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Guide to Penny Stocks for Teens (Or Beginners)

If you’re looking into trading with penny stocks, I’m sure you’ve heard or seen people make HUGE return on investments and are wandering how can I make money investing in penny stocks? I’m not here to say that you will make money through them, investing in penny stocks requires lots of research, and even with tons of research you can lose all your money. Although if you find that company that is about to blow up they you could be looking at a massive payout.

What is a Penny Stock?

The SEC (Securities and Exchange Commission, the US Government Agency that is responsible for maintaining fair, orderly and efficient markets) defines a penny stock as security being issued by a small company that trades for under $5 per share.  Many investors treat a company trading at less than $1 per share as a penny stock.

Notable Characteristics of Penny Stocks: 

  • They are small companies.

 

  • Investing in them has a high risk.

 

  • Because of their low market capitalization (size) these companies can have problems with liquidity (cash on hand to pay their bills)

 

  • Slight changes in the price of the stock can lead to big gains (or losses). 

 

  • Reporting requirements may not be as strict for penny stocks as they may be for bigger, more conventional, stocks.

 

  • Many, but not all, penny stocks aren’t traded on bigger stock exchanges that have more strict reporting requirements.

 

  • Many, but not all, penny stocks are traded through a quotation system like OTCBB (Over The Counter Bulletin Board) or the OTC Markets Group (commonly known as the Pink Sheets).

 

  • OTCBB does have some reporting requirements, but they aren’t typically as tough as the ones issued by bigger stock exchanges.

 

  • They do not trade as often as more conventional stocks.

 

  • Because of the higher risks involved with penny stocks, the market isn’t as active as it would be with more conventional stocks.  Because of the lower trade volume, it may be harder to sell the penny stocks that you hold.

Where Can You Buy a Penny Stock?

Through a broker.  Brokers often have surcharges for investing in stocks that are trading below a certain amount.  The amount of the surcharge and the amount of the cut-off value can change, but it does have an impact on your potential return.  If a broker charges you $4.95 per trade and $0.01 per share, the cost of the trade can increase significantly.  If you wanted to invest $500 in a company that was trading at $0.10 per share, you would be buying 5,000 shares in the company.  At $0.01 per share, the surcharge would be $50.  That would mean that the $500 that you wanted to invest in the company would cost you $54.95 (the $50 surcharge plus the $4.95 trade fee).  Effectively, you would have to get a return of 10.99% to break even on the transaction.

Additionally, some brokers have volume restrictions.  They limit the number of shares that you can buy on a single trade or they charge more for large orders.  The amounts vary by broker, so keep an eye out for this when choosing your broker.

Some brokers require you to make the trade by phone, rather than on an online platform.

Some brokers have an account minimum.

If you’re seriously considering investing in penny stocks, look for a broker that doesn’t have:

  • Trade surcharges
  • Volume restrictions
  • Online trading
  • An account minimum that you can meet

If you have more conventional stocks in your portfolio, you may have to open a separate trading account with a different broker to help reduce your fees.

 

Brokers That Are Worth a Look

Before choosing your penny stock broker, do your research to find out which one will be best for you.  Here are some that I like:

TD Ameritrade

  • No account minimum
  • $6.95 trade commission
  • No trade surcharge on penny stocks
  • A good trading platform

Charles Schwab

  • $1,000 account minimum
  • $4.95 trade commission
  • No trade surcharge on penny stocks
  • A good trading platform

E*Trade

  • $500 account minimum
  • $4.95 – $6.95 trade commission (depending on volume)
  • No trade surcharge on penny stocks
  • A good trading platform

The above account information is accurate as of the time of writing, but fee structures and account minimums can change.  There are plenty of other good brokers out there that may be more suitable for your investing style, so please do your research before choosing your broker.  Remember to watch out for:

  • Inactivity fees: Some charge fees if you don’t do a certain amount of trading in each period
  • Additional account fees: Some charge a monthly fee on some types of accounts

Should I Invest in Penny Stocks?

Maybe.

The risk-reward trade-off is significant with these types of investments.  If you read up on penny stock investor discussion boards, you’ll undoubtedly hear stories of investors making huge returns in a short amount of time.  Having a small investment turn into a big pile of money sounds great, but these investments also come with risk.  While it can happen, not every penny stock will turn into a pile of cash.  You can just as easily lose your entire investment in the company. 

If you’re going to invest in penny stocks:

  • Be careful.
  • Don’t invest more than you can afford to lose.
  • Make penny stock investments a small part of your whole investment portfolio.  Having a balanced portfolio will be more likely to get you to where you want to go.  Balance risky investments with solid investments that will get you a stable return to make sure that you still have investment gains if the penny stocks tank.
  • Remember that the stock market is about investor perceptions as much as it is about the actual performance of companies.

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