How to Trade Penny Stocks

In this post I describe the actual penny stock trading process. Most people will find that learning how to trade penny stocks isn’t that difficult from a technical standpoint, but you should weigh a number of variables before you start tossing your money around. As always, I urge patience and due diligence when trading penny stocks.

Penny Stock Brokers

The beginning step in understanding how to trade penny stocks is to open a stock trading account with an online broker. There are many online brokers from which to choose. The most popular online brokerages are E*TRADE, Scottrade, and TD Ameritrade, but this doesn’t necessarily mean they’re the best penny stock brokers for all situations. Some argue that Zecco is the way to go for beginning penny stock traders. Please read more in my broker article: Penny Stock Brokers.

The important part here is that you carefully familiarize yourself with each broker’s conditions and terms, paying particular attention to their transaction fees. You’ll note that most major brokers feature either a separate fee system or an additional fee for penny stock trading. Don’t just go for the cheapest; try to consider all the penny stock variables. In some cases a discount broker might actually have higher fees to trade penny stocks than standard stocks.

Penny Stock Newsletter

Be sure to subscribe to any kind of penny stock newsletter provided by your online stock brokerage service. Unlike the scam-ridden newsletters you’re offered online, your broker’s penny stock newsletter can really help you learn the ins and outs of how to trade penny stocks online.

Connecting Accounts

Then you’ll need to connect your penny stock broker to a bank account. When you do this, you know you mean business. It is a step which is a bit nerve-wracking for many. For this reason, I suggest you isolate your trading account into a new, separate account at your bank. This will help you isolate and master how to buy penny stocks and help you keep better track how much is going in or out of this separate account.

Connecting a bank account with a broker account and verifying it can take a few days, so be patient. Sometimes it helps to open an account with a broker managed by your bank. For example, Sharebuilder is owned and managed by ING Direct.

Trading Penny Stocks

So now that you’ve got your online broker account open and once you’ve tied it to your bank account, you’re ready to roll. You’ll now need the following data to trigger your first buy order:

  • Where does the stock trade? (NYSE? Pink Sheets? OTCBB?)
  • What is the penny stock’s ticker symbol?
  • The volume (the exact amount) of penny stock shares you desire to buy
  • In most cases you can save on fees by trading penny stock shares in multiples of one thousand. (This may really disappoint some of you expecting to literally start trading in pennies.)
  • Define your specific purchasing price.
  • IMPORTANT: Define your expiration date. This is how long you wish to hold your order open, or the last closing date on which you would accept this exact trade stock, price and volume.

So, for example, your buy order might look like so:

Purchase 5000 certificates (or shares) of Pretty Potatoes, ticker symbol PTYPS at 27 cents or under. Stock lists on OTCBB. Maintain order until Wednesday, November l7th.

So if your chosen stock hits 27 cents or under before November 17th, your broker will add 5000 shares of it to your account and your account balance will lower by the cost of the shares and the broker commission.

In the opposite direction, you do exactly the same process but you put in a limit order with a date deadline which tells the broker that if the penny stock hits a certain value by a certain date, sell it.

I hope this helps you better understand how to trade penny stocks. As I’ve said in other articles, it’s a good idea to practice with online paper trading before you dive into risking your own money. Trading penny stock can be fun and rewarding if you’re responsible and thorough in your preparation, but you must understand how to trade penny stocks before you wade into these dangerous waters.