How to Buy Penny Stocks Online Safely
How to Buy Penny Stocks Online
Because of the potentially great gains that can be achieved from buying penny stocks, and the low cost of entry, most investors are eager to start penny trading. Who doesn’t want to become a millionaire, as many have done, by getting in early on small companies with great prospects?
But buying penny stocks, like any investing, can also have its risks if proper steps are not taken. Here is some helpful information and some steps to take for buying penny stocks online safely.
Chose a Penny Stock Broker:
First, choose your broker and open a brokerage account for buying penny stocks. I’d do this first, because your broker can also assist you in researching penny stocks.
Speak to several online discount stockbrokers like Scottrade, E*TRADE, Zecco, or OptionsXpress. See “Choosing a Penny Stock Broker” for more information.
Research Penny Stocks:
Next, Start looking for companies and gather information on penny stocks to buy. Information on penny stocks may or may not be scarce. Try contacting a broker to get a prospectus to find more information on companies with penny stocks.
Look online on Securities and Exchange Commission filings on the companies you are interested in.
Call and talk to the company directly to get the financial statements. You may also be able to talk to someone who is most knowledgeable about the company.
Perform a fundamental analysis and technical analysis. If you don’t know how you should learn, or invest in a good penny stock newsletter of penny stock picks.
You can research penny stocks online through forums, bulletin boards, news sites, or subscribe to a good penny stock newsletter. Discussion forums at Zecco, Superior Investor and Online Traders Forum have good research tools for online penny stock traders. Ask your online stockbroker for their recommendations. But that being said, do not rely solely on your broker’s advice.
You should learn about the market in which the penny stock trades to determine how much demand there is for this stock and how difficult it will be to sell. Be especially careful if your broker is offering to sell you newly issued penny stock that has no established trading market.
Practice Buying Penny Stocks:
Once you decide which penny stocks look promising, it’s time to start investing. Narrow your choices and select the penny stocks to buy. I recommend you “paper trade” first, which is investing fake money in a hypothetical trade of the penny stocks you find promising.
Both OptionsXPress and E*TRDE have a system set up so that you can make pretend trades (also called paper trading). They give you electronic fake money to work with and you make fake trades while you are learning.
Paper trade some penny stocks a few time before doing any real penny trading. You can learn about buying penny stocks this way without risking any real money. You will also become experienced with the online interface in the process.
Buying and Selling Penny Stocks:
When you’re ready to start buying penny stocks for real, go ahead and purchase your penny stocks. Simply enter the penny stock’s trading number in your stockbroker’s online trading platform and buy the amount of shares or dollar amount you’d like to invest.
Depending on your broker, with penny stocks you may want to buy in multiples of 1000 shares, if doing otherwise is subject to extra commission charges. Check with your broker’s rates.
Determine the price you are willing to pay for your shares. This is done by placing either a “Market Order” or a “Limit Order.”
A “Market Order” means you are willing to pay the best available price at the time. A “Limit Order” means you will specify a price which you are willing to pay, and your trade will only take place if shares reach that price.
Most people use limit orders, to increase control over the transaction and to avoid price volatility.
Set the duration of your order. For example, you may keep your order good for just for that trading day, or have it good every trading day until expiring on a date you specify, which could be days or later.
As an example, on Monday you might place your order stating, “I want to buy 5000 shares of XYZ Mining Corp., ticker symbol XYZ, at $1.89 or less. The stock is on the Vancouver exchange. Have the order active until Friday; end of this week.” If the price of XYZ hits $1.89 or less, your broker should acquire the shares for you.
A sell order is simply the reverse process of buying.
Penny Trading on Autopilot:
Be sure to diversify among a handful of stocks to reduce your chance of loss and, as with any investing, only invest what you are comfortable to lose. As you gain more experience in analyzing penny stocks, or if you utilize a good penny stock newsletter of penny stock picks, your successes will increase.
Monitor the stock daily through your stockbroker. Sell quickly when the stock price moves up to lock in your profit or when it moves down to limit your loss.
You can usually add automatic sell orders with your broker if the stock reaches a certain value, either up or down, pre-specified by you, so you can automatically book a profit or limit a loss. This puts your trading on autopilot so you don’t have to monitor the market all day.
Penny Stock Prices:
When you are buying your penny stocks on an exchange, you will enter the bid price you are willing to pay for your penny stock, but you will pay the asking price from someone who is selling. When a buyers and sellers bid and ask price meet at an agreed amount, the trade takes place. See “Bid Price vs. Ask Price Explained” for more detail.
The difference in price between the bid price and ask price represents the commission that a broker and/or a securities dealer makes in the transaction. This is called the spread.
At any one time, for any given penny stock, there are usually several buy and sell orders pending at different prices. However, when you check a stock quote you will only see the highest bid price and the lowest ask price, representing the most that investors are willing to pay for the shares, and the lowest price at which shareholders are willing to sell, respectively.
Due to the “best price” priority, your buy order for a penny stock will not get filled until all buy orders of a higher price are filled first. Likewise, your sell orders will not get completed until all sell orders of a lower price are filled. When multiple orders exist at the same price, the orders are usually handled in the order in which they were received.
Unfilled Penny Stock Trades:
Depending on circumstances, your order may not be completed. This is due to the order in which trades as described above, and possibly a light volume of shares trading. In such cases, you may not always get your order filled.
You may put in an order to buy at a certain price, and find that the shares did not trade at that price during the duration of your order, and therefore you did not make the transaction. In this case, there will be no broker fee when no trade takes place.
Partially Filled Penny Stock Trades:
Sometimes your penny trade may be partially filled. You may want 5000 shares of a penny stock, but only get 2000. This is because only 2000 shares were available at the price you stipulated. This applies to both buying and selling.
If you notice this case by mid-day, you can respond by adjusting the price of your order to ensure you trade all the shares you want. You will not get an extra commission for that.
However, if your order spans several days and is partly filled on more than one day, you will get a commission charge from your broker each day you trade shares, but only for those shares traded each day.
Canceling and Changing Open Orders for Buying Penny Stocks:
Buy and sell orders can be cancelled or changed if the order is still pending. Consult your broker for more information about changing open orders.
With each new trade and as you gain more experience you will become an expert on how to buy penny stocks online safely. You will also soon discover that it only takes a handful of good penny stocks companies to become very wealthy. There is great reward, but there is great risk.
Getting Started Buying Penny Stocks:
Your knowledge and research is the key. You should also supplement your research with a good penny stock newsletter. Click here for a good penny stock newsletter of penny stock picks, backed by a money back satisfaction guarantee.
Now that you know more about how to buy penny stocks online safely, happy penny trading.
Buying Penny Stocks
