Unless you are fortunate enough to have received stock in a public micro-cap company because you have insider status (whether as a company officer or director or by virtue of your relationship with an officer or director), or because you entered into a Subscription Agreement prior to the stock’s registration, or perhaps because you provided services to the company and got paid in the form of shares received by you under the Securities and Exchange Commission’s rule 144, then in order to purchase stock in a public company you will have to engage the services of a registered broker. In fact, with very few exceptions (such as those listed above), all stock transactions, whether buy or sell, must by law be executed by a brokerage house registered with FINRA (the Financial Industry Regulatory Authority, which, since 2007, has been the successor to the former NASD), through an equally FINRA-licensed broker.
While brokerage houses themselves may be abundant and thus easy to find, be aware that not all brokers are interested or willing to execute penny stock trades for their retail customers. In general, this is true because they believe that the commissions to be earned from executing penny stock trades do not justify the expenditure of time and effort on the part of their licensed staff; in addition, many brokerages choose to avoid any perceived liability issues associated with trading penny stocks. For the same reasons, even fewer brokers seem willing to allow paper (i.e., non-electronic) trades.
In searching for a broker, therefore, the first thing you must determine is whether they are willing to handle penny stock transactions. Assuming that they are—and be assured that many brokerage houses indeed are, and would actively welcome your business—you must then discern which broker is best-suited to meet your particular needs, which certainly will be different from those of other investors. This decision is not to be taken or made lightly, because there are so very many factors to consider, and you must be certain to have reflected on all of them before deciding to move forward with any particular broker.
The first important criteria to consider is whether the broker requires a minimum opening deposit of an amount higher than your available disposable capital, or whether the required amount is within your means. Because you should never stake your account with an amount that you cannot afford to lose, eliminate those brokers whose required minimum is above your capital comfort level.
Carefully review the remaining brokerages’ fee schedules. When doing so, have at least a general idea in mind of the number of trades that you anticipate entering into in a monthly period. Compare monthly fees, if any, against quarterly or annual fees charged by others in order to get a feel for the actual costs of maintaining your trading account. When making this comparison, be sure to include any account maintenance fees, as well as any inactivity fees, that may be charged (as the name implies, “inactivity fees” are levied when you place fewer buy or sell orders in a given period than your brokerage requires, according to the account’s terms and conditions). In addition, be certain that you understand whether the brokerage imposes any per-trade fees and if so, estimate these costs, based on your anticipated number of trades per month. Factor all such applicable fees together such that you can perform an apples-to-apples cost analysis among all potential brokerage service providers. Eliminate those candidates whose total projected account-related costs preclude their use.
At this stage, it is crucial to determine whether the brokerages you are considering charge a premium for executing penny stock trades, as many are wont to do. If so, you must investigate the price level below which the brokerage considers a stock to be a penny stock: many that charge a premium for such trades will do so for any stock trading at less than $3.00 per share, while for others, the threshold may be $2.00 per share, or may be as low as $1.00 per share. This premium, factored together with your projected number of monthly trades, can easily accumulate into a surprisingly high cost factor and thus eat up a correspondingly large chunk of your gross trading profits.
Now that you have carefully weighed all cost-related concerns, you should be left with a short list of potential trading account service providers. Your last step in the process of picking the best brokerage for you is comparing the brokers to each other in terms of the type and level of service that you can expect to receive from them, so that you can find your perfect fit.
Ask yourself what level of service you will require: will you be making all investment decisions yourself, relying on a broker to simply execute your orders, or will you desire to have access to a broker’s experience, input or assistance in making buy or sell decisions? Further, will you require regular access to the broker himself, or will it suffice to simply have online access to your account? If online access, such that you can enter your own orders, is sufficient for your needs, will you require that access at all times, or only during trading hours? Compare the stated accessibility not only to the broker, but also to your account, as you continue to parse brokerages and eliminate those that do not meet your criteria from your list.
Consider the availability of non-broker support: would you like to have the ability to create charts, or to access research and reports prepared by the brokerage’s analysts? If so, then look for an online broker offering these tools. Consider, also, the brokerage’s trading response time: will your orders be executed in a timely manner, or will there be lags or gaps between the time that you place your order and the time that it is executed? Lastly, consider the broker’s interface: is the technology user-friendly and easily understood? Are the log-in and authentication procedures cumbersome?
By now, you should be left with a very short list of brokerages that fit your risk, capital and personal preference profiles quite well. Other things being equal, choose the one that enjoys the better reputation with either the SIPC (the Securities Investor Protection Corporation, an organization responsible for protecting investors from incurring a financial loss in the case that a brokerage fails, or a broker steals funds from a client), with FINRA, or with both. Open your account, and start buying penny stocks…and reap the rewards of managing your growing investment portfolio.
