To obtain a trading account for penny stocks does not differ much from obtaining any other brokerage account. Listed in the Resources section are three of the most probable brokerage choices. What is most important is to do away with the “boiler room” hard sell brokers who tend to charge large mark-ups for companies which are likely to have a substantial interest in it. These are also referred to as “pump and dump” brokers who are engaged in selling the promise of profits by means of a company having very poor management or very little infrastructure. Given below is information that will prove invaluable for any penny stock trader out there.
How can a penny stock trader get a trading account
- The first and foremost thing which you need to do is trade penny stocks with the utmost care, not to mention, diligence. Penny stock companies are said to have poor financials. This assumes the form of an imperfect sales man, not to mention part-time management. Brokers are likely to represent one or more of such companies and are likely to be lacking in the desired expertise to end up becoming market makers in penny stocks.
- It is important that you buy and sell stocks by means of companies which participate as affiliates or members of the major exchanges. Steer clear of penny stock brokers trading only penny stocks. Call the National Association of Security Dealers in Washington D.C. to check whether federal charges, complaints or investigations on record go against a certain company.
- Ask the broker if he is a market maker as far as the penny stocks are concerned. Market makers tend to buy and sell shares from their account or be in a position to receive a brokerage fee should they match the buyer and seller. You cannot pledge to hypothecate penny stocks beneath the security rules, as they trade under $5 for each share.
- It is important that you analyze whether the trader happens to be selling you a “story stock” or obtain a promise of future earnings sometime in the near future. The promise needs to be compared to the company fundamentals. Find out how long the company has been public and also who happens to be their banker as well as investment banker. Very few penny stocks actually help the investor make money.
- It is important that you be aware of the difference which exists between spread or difference in price between the bid and asked. For instance, it is possible that a stock might be offered at 20 per cent bids at around 30 cents. The implication here is that the broker charges 50 per cent for rights to buy and sell the stock. Mark-ups like these make it difficult for those wanting to make money.
The guidelines mentioned here should suffice for a penny stock trader to get a trading account.