How to Begin Investing in Penny Stocks

by Kimberlee Leonard ; Updated July 27, 2017

When you buy a stock for a penny and it moves to 2 cents, you've doubled your money. This is the attraction for investors seeking high returns for little investment. The Securities and Exchange Commission refers to penny stocks as speculative securities trading for very low prices, often below $5 per share. Most penny stocks trade on the OTC Bulletin Board or the Pink Sheets. There are no guarantees when investing in penny stocks and investors should always perform their own research before buying any penny stock.

Step 1

Find a broker-dealer who is authorized to sell penny stocks. The SEC requires increased suitability and disclosure regulations by firms selling penny stocks. Ask a professional tax adviser or financial planner for referrals.

Step 2

Open the account by filling out an account application, prior investment history and disclosure of assets. The SEC requires each broker-dealer to maintain this "suitability" information as part of the "know your customer" rules. You will not be able to open the account without at least basic financial disclosures.

Step 3

Confirm the commission schedule for each transaction. The SEC allows no more than 2.5 percent on each transaction. Commission is negotiable, particularly for larger transactions.

Step 4

Fund the account with the amount of money you will be investing. Minimum values are required at some firms, but not all. Ask your broker or customer service representative for details when opening the account.

Step 5

Learn the jargon regarding the "spread" when buying and selling stocks. The spread is the difference between the bid price and the offer price. Bid price refers to the value one broker-dealer is willing to buy the stock for from another. The offer price is the value one broker-dealer is willing to sell it for to another. For example, ABC stock may have a bid of $0.10 and an offer of $0.15 with a spread of $0.05. For you to make money, your bid must rise above the spread plus any commissions on the trade.

Step 6

Locate resources you can trust. This is often the greatest challenge for those starting penny stock investments because reliable information is often so scarce. Some broker-dealers offer due diligence reports on stocks they hold inventory on as broker-dealers, but you still want to do independent research. Contact the investor relations department of the company and look for any industry journals pertinent to the company and what it offers. Select stock information is also available through online research resources, such as Yahoo Finance or MSN Money.

Step 7

Place an order to buy the stock directly with your broker. Plan on holding the stock for a while if there is not a lot of daily activity on it. Invest funds you don't anticipate an urgent need for since no one may be interested in purchasing your stock when you want to sell.

Warnings

  • Penny stocks are susceptible to fraud and market manipulation. If you feel your broker-dealer is not acting in your best interest or suspect wrong doing, contact the Financial Industry Regulatory Authority or the SEC to report your concerns.

About the Author

With more than 15 years of professional writing experience, Kimberlee finds it fun to take technical mumbo-jumbo and make it fun! Her first career was in financial services and insurance.

Photo Credits

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