Do you know how to buy and sell a penny stock? Chances are, you do. If you know how to buy MSFT or GOOG then you're set - because the actual process is the same. You fire up your broker's website, like E*Trade or Scottrade, look up the symbol and execute the trade. Selling is the same too. Open the broker's site, find the stock in your portfolio and execute a trade to sell the stock.
So, if it really is that easy, what's this article all about?
There are a few differences between buying and selling a penny stock compared to a traditional stock.
First, not all penny stocks are listed, or supported, by your online broker. Because there is significantly more risk carrying penny stocks, some online brokers do not list them all. You might find a good penny stock you want to invest in, only to find it isn't listed by your broker.
To compensate for the risk, some online brokers charge more fees on top of the trading fee. This is typically a percentage of the trade's worth, or fixed amount per share. For example, to trade the micro stock ABCD, which is valued at $0.01, a broker may charge you 0.5% of the total trade value in addition to the $9.99 trading fee. If you bought 10,000 shares, it would cost you $110.49 ($100 for the stock, $9.99 for the trading fee, and $0.50 as a surcharge). These costs can add up as you add to your portfolio - especially if you trade in larger volumes.
Each broker has their own rules, but many surcharge on stocks valued at less than a dollar.
Also, you have to understand that sometimes selling (and even buying) a position in a penny stock can be much more difficult than a traditional stock. To buy a stock, there must be outstanding shares available. To sell the stock, someone must be willing to buy. Sometimes, depending on the stock, it may be hard for either condition to be true.
To protect themselves (and presumably you) most online brokers require you to put penny stock orders in as limit orders instead of a traditional market order. In a limit order, you specify a price (a cap) you want the stock to be at before the order executes. Because prices can fluctuate rapidly, chances are the price you see isn't necessarily the price the stock is at currently. For example, let's say ABCD is at $0.01 and you want to buy it but spend no more than $0.03 per share. You would enter a limit order of $0.03 and the trade would execute as long as the price was equal to or less than three cents.
A limit order to sell works the same way. When the price reaches let's say $.10, if you enter a limit order to sell at $.10, the trade would execute. Some brokers also allow you to specify the "low" point to sell at (limit loss or stop loss). For example, if ABCD falls below $0.02, sell the stock to cut your losses.
These are different from market orders which execute at the current market price. Again since prices rise and fall rather dramatically, these measures are in place to protect you.
I hope you have learned more about trading penny stocks - happy investing and good luck.
DISCLAIMER: I am not a licensed financial advisor, investment broker or analyst. I am just an amateur trader giving his amateur unbiased opinion and sharing with the community what works for me. Always use prudent investing, and never invest more than you can afford to lose - in other words, be prepared to potentially lose whatever you invest.
Written by Samory Borry
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