Penny Stocks 101
Knowing what you’re getting into is important when it comes to trading penny stocks or any publicly traded equity. Everyone wants to get rich investing in the stock market, but you’ve got to start somewhere.
An excellent first step is to learn how to trade. Knowing how to conduct technical analysis, handle fundamental research, and gain insight into using stock market trading tools can help. Unlike what you might expect, some skill goes into this stock market game, and today, we’re going to discuss one of the necessities that all traders and investors need to make money with stocks. That necessity is having a broker.
What Is A Stock Broker?
A stockbroker is a financial professional or “registered representative” who executes trades on their clients’ behalf. In general, stockbrokers work for a brokerage and manage trades for several customers. You might also hear the term “stock broker” used when discussing the brokerage firms themselves. Think about how most people trade in the stock market today. They typically use a self-directed method through an online broker. In this case, it’s not a person you’re dealing with but a company and its trading platform.
How Do Stock Brokers Make Money?
Stock brokers make money through trade commissions. However, many compensation methods change depending on a specific firm.
Penny Stock Brokers
When it comes to trading penny stocks, brokers are a bit different compared to others. First, if you are looking to invest in OTC companies, you’ll want to find a broker that allows access to these types of stocks. In many cases, platforms like Robinhood and Webull restrict access or only offer limited access to OTC stocks, in general. Due to less stringent reporting requirements, thin trading, and the known instances of market manipulation, brokerages assume more risk when including Over-The-Counter stocks in their offerings.
What about brokers that offer access to OTC penny stocks? Many will include additional fees in certain circumstances. For instance, TDAmeritrade has a disclaimer that a $6.95 commission applies to online trades of OTC stocks. Other stock brokers like ETrade offer commission-free trading. However, as its website states, “The retail online $0 commission does not apply to Over-the-Counter (OTC), foreign stock transactions, large block transactions requiring special handling, transaction-fee mutual funds, futures, or fixed income investments.”
It isn’t just OTC companies that qualify as penny stocks, however. As we know from the standard definition, we are talking about stocks under $5, and plenty of Nasdaq & NYSE-listed stocks are out there. The important thing to remember when looking for the best penny stock brokers is to find the one that meets your needs to help you reach your goals.
“Old School Brokers” VS Brokers Of Today
When you talk about retail traders, you’ll rarely see someone picking up a phone and calling a person to place a trade. It takes far too long to execute an order fast enough to compete with electronic trading. But what may have taken its place is investment advisors.
Registered investment advisors (RIAs): the new “stockbrokers”
The traditional stockbroker role is disappearing, as old-school brokers are getting replaced by a growing number of “registered investment advisors,” or RIAs. A registered investment advisor is not a salesman and is generally held to a higher standard when selling investment products to investors than a broker-dealer. Instead of placing trades, they are seen as more of a consultant to investments.
Wealth management services allow investors access to the market without taking on the added burden of deciding what to buy and sell themselves. For a fee, they can invest their capital with a registered advisor who will then take it and (hopefully) invest it appropriately based on an investor’s strategy and desired goals.
RIAs are generally in the business of selling advice, not financial products. People typically hire RIAs on a flat fee as a percentage of their wealth each year or simply on an hourly basis to help them make informed decisions about how to invest their money.
This article discusses what stock brokers are, so we won’t go too much into the different factors of an RIA. However, it’s good to know that there are options when investing in the stock market. Generally speaking, most advisors will stray away from high-risk investments, no matter if it’s penny stocks or something else. If you are interested in having stocks under $5 in your portfolio, it would be best to speak to your advisor in more detail.
Articles On Penny Stock Basics
If trading penny stocks is attractive to you, here are a few more articles you might find helpful: