How to Buy Penny Stocks

Penny stocks are low-cost, fairly risky stocks that usually cost under $5 per share.

Investing in penny stocks is a risky business, and it can be a little complicated. If you are game, do some investigating of the stocks and brokerages and how penny stock trading works.

Difficulty:

Moderate

Instructions

Things You'll Need

• High risk tolerance
• Brokerage account

1. Stocks are generally considered penny stocks when they trade for under $5 a share, but the truest form of a penny stock is a stock that trades on the over the counter bulletin board exchange (OTCBB).

2. To buy penny stocks on the OTCBB, an investor needs to set up a brokerage account. Make sure you sign up with a broker who allows over the counter trading, although most do now.

3. If you are interesting in buying penny stocks, you likely will be buying and selling fairly often, so you use a discount brokerage account. Many of these allow you to trade penny stocks for less than $10 a trade. Some brokerages make traders pay more to trade penny stocks, but others don't.

4. Buying a penny stock is very similar to buying a regular stock. One difference is that penny stocks trade on different market exchanges so you will need to know where the stock you wish to buy is trading before setting up your order.

5. Before investing in a penny stock you should monitor the stock to see how liquid it is. If the stock isn't liquid you will have a hard time making money on it. Penny stocks are far more risky than others, so before you buy, do your homework.

Tips & Warnings

• Do extra homework and prepare to put lots of time aside for research.

• B prepared to lose money rather than make money when you invest in penny stocks.

• Penny stocks may have less information available than regular stocks have. You often don't know what you are buying.

• Penny stocks often are pumped and dumped by big traders looking for a quick buck, which hurts the average investor.

References

• Investopedia: The Lowdown on Penny Stocks
• TradeWiser Penny Stock Brokerages