Before you can learn how to trade penny stocks, you need to understand exactly what this micro cap stock is, and you need to appreciate the great risk involved in dealing with off-exchange stocks. If you choose to buy penny stocks online, do so with caution and care.

What Are Penny Stocks?

To compute the market capitalization of a stock — also known as the market cap — you need to multiply the penny stock cost of the company with the number of shares that are outstanding. By executing this computation you will be able to ascertain what the full dollar measure of all shares within the company are at some specified point in time.

Penny stocks are not listed on a securities market like some other stocks. Yet they’re listed in the over-the-counter market, also known as the OTC market. For the dealing of most stock a broker may act upon the investors behalf and arrange a transaction direct between the investor and a 3rd party. The agent then picks up a commission for helping the buy.

For an average individual new to buying penny stocks, they need to utilize an online penny stock broker to initiate online penny stock trading. A broker — or agent — can be conceived as the contact between you and the market. An individual informs the broker he wishes a certain volume of shares of a stock, and then it’s the broker’s task to execute the order.

Penny Stock Brokers

You may employ a ‘full service’ broker to guide you with your deals and help you select the best penny stock for any given moment, or a discount broker like E*trade. A discount broker allows you to enter your own trades by an online user interface. This preserves much money on commissions you’d otherwise have paid for each executed order. People often utilize discount brokers for trading penny stocks.

A generous proportion of all penny dealings are charged by non-discount agents as principle transactions. This means that the agent is not compensated any commission but instead earns its profit on the spread, and by purchasing and trading penny stocks at opportune moments. There’s no exclusive cost at which penny stocks are purchased and traded, but instead there are a number of diverse costs.

The deviation between the bid and ask cost is identified as the spread. The spread of most penny stocks is generally about 20 to 35 percent but may frequently become 50 to 100 percent. There are also always 2 bid and 2 ask costs; these are identified as the inside and outside bid and ask. Remember that it’s the outside bid and ask that is of most concern generally. Penny stocks are also subject to mark up pricing. This is where an agent has harbored the stock in his account and has consequently accepted some of the hazard affiliated with market value fluctuation.

To trade penny stocks, most times you’ll want to work with a discount broker, like E*Trade or TDAmeritrade. All online stock brokers have their strengths and weaknesses. People who have taught me the ropes seem to feel that TDAmeritrade is the most established discount broker for dealing with penny stocks. However, another discount broker you might consider is ShareBuilder. ShareBuilder provides strong features for growing portfolios involving low commissions.

Here are some variables I suggest you consider when choosing an online discount broker:

• Comprehensive and accessible features and benefits.
• The minimum amount required to open an account.
• Fees for going inactive, which is likely as you’re beginning and studying.
• Most importantly, commission fees (and always be sure to read the fine print).

A few agents will accept lower primary commissions, but comprise the difference in supplemental fees for online penny stock trading in low-price stocks, or by not including premium features at lower levels of trading activity. Make sure you consider all variables of the discount broker before you commit to enlisting their services.

Weight the Penny Stock Risks

While this market can be challenging — and remember that there really are quite a few problems associated with online penny stock trading to go with the millions of dollars of lost — several companies still deal in them for they can assist clambering new companies just trying to get started. Remember that in stock trading in general, the best way of finding a good investment is by consulting with a trustworthy agent or broker with whom you’ve established a strong relationship.

When it comes to trading penny stocks online, we suggest discount online brokers because the penny stock market is wrought with individuals trying to take advantage of novice traders. Eliminating a questionable middle man empowers you to make sound a judgement without someone else trying to make a buck off you.