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How to Buy and Invest in Penny Stocks in 2020

Learn everything about penny stocks and how to buy and invest in penny stocks in 2020
Maggie Smith
Author: Maggie Smith
Last Updated: April 1, 2020

Penny stocks are the source of some of the biggest FOMO (fear of missing out) regrets. Who would not have wanted to have invested $100 in Netflix when it was trading for $1 in 2003? Today, after several stock splits, those 100 shares would be worth over $30,000. The opportunity to support an early-stage media or biotech company is one of the many reasons investors are excited about penny stocks. Because penny stocks trade for a few dollars, and many for less than a dollar, the upside potential is huge.

However, if you’ve never bought penny stocks before it can be a difficult to know how to get started with penny stocks. This step-by-step guide will explain how to buy penny stocks for beginners in a simple way. We will also explain the penny stock definition, when to buy penny stocks, where to buy them and how to get the most out of your penny stock trading experience.

Want to buy penny stocks now?

Follow our quick guide below if you are ready to buy penny stocks today.

  1. Sign up to Charles Schwab if you are in the U.S.
  2. Locate the penny stock you are interested in with their “market screener”
  3. Choose from Micro Cap or Small Cap
  4. Select your price criteria
  5. Click on trade and place your order
  6. You now own penny stocks!

What are penny stocks?

How to Buy and...

Penny stocks are stocks with a market capitalization of less than $300 million. These small caps typically trade for less than $5 a share. They are categorized as:

Microcap stocks – Stocks that have market caps between $50 and $300 million

Nanocap stocks – Stocks with market caps of less than $50 million

Many trade over-the-counter (OTC) but they may also trade on an exchange. You may also see penny stocks defined as:

  • Small cap companies
  • Stocks with a maximum price under $5 (Schwab), under $3 (Fidelity) or under $1 (Robinhood)
An OTC stock is not listed on a major exchange. Instead, they trade on an electronic bulletin board that directly connects buyers and sellers. Individual investors still need to go through a broker to access the major OTC platforms.

Why invest in penny stocks?

The main reason people invest in penny stocks is because penny stocks are cheap to buy, hence they provide a low risk-high reward investment opportunity.

Pros:

Cheap penny stocks offer the chance to fulfill the investor mantra: buy low, sell high.

  • Cheap to buy at less than $5 per share
  • High capital appreciation potential

Cons:

However, penny stocks also introduce many risks, including the possibility that you will not be able to sell the stock at all in an illiquid market.

  • Minimal reported information
  • Low liquidity
  • High price volatility
  • Wide bid-ask spreads
  • High trading costs
  • High probability of company failure
  • Dark pool trading with masked prices and volume
Penny stocks are speculative investments. They have wide bid-ask spreads, low liquidity, high counterparty risk, and minimum reporting requirements. Buying penny stocks on margin multiplies your potential gains and losses.

How to buy penny stocks : step-by-step tutorial

Are you wondering how to buy stocks? Unsure where to start and what sites to buy penny stocks from?

Then read on because the section below will explain step by step how to get started with investing in penny stocks in just a few steps.

Buy penny stocks in the U.S.A with Charles Shcwab

Many of the most popular online stock brokers offer penny stock trading. Most of them also offer stock trading apps allowing you to trade on the go. In addition to exchange-listed small cap stocks, brokers like Fidelity, Charles Schwab, TD Ameritrade, and Interactive Brokers provide access to OTC trading. Brokers that provide access to thousands of stocks across major exchanges will have the widest selection of small caps.

The best option for buying penny stocks in the U.S.A. is without question Charles Schwab. They offer access to a large universe of exchange-listed small-to-large cap stocks, as well as access to the major OTC markets.

Step 1: Open your Charles Schwab account

Firstly, start by clicking here to open your account. Fill in your personal information and fund your account.

Step 2 : Start your research of penny stocks using the Charles Schwab Market Screen

How to Buy and...

How to Buy and...

This broker provides profiles of penny stocks, but as always with penny stocks, you may have to undertake some of your own research and due diligence. If the stock is covered, you will benefit from the extensive analysis from Morningstar. The market screener allows you to quickly locate small cap stocks. Choose from Micro Cap or Small Cap and select your price criteria.

Step 3: Invest in penny stocks by clicking on “trade”

Click on the stock you want to trade. From the stock profile page, click Trade. Place your order.

How to Buy and...

Buy penny stocks in the UK with Interactive Brokers

In addition to small cap listed stocks, Interactive Brokers provides access to the following OTC markets:

OTCBB

OTC Markets Pink (PINK) – Access thousands of stocks trading on the Pink Sheets.

ATSs – ArcaEdge. IB also allows traders to trade directly over-the-counter with its ECN service. Separate fees will apply.

Step 1 : Open your Interactive Brokers account

Firstly, get started by opening your Interactive Brokers trading account by clicking here. The platform also offers an investment app allowing you to trade on your smartphone. Once your account is active and funded, move on to step 2.

Step 2: Access OTC Markets and ArcEdge

In order to trade penny stocks, you will have to access OTC Markets and ArcEdge then add “United Kingdom (Penny Stocks)” to your trading profile.

On the OTC Markets Pink Sheets, many stocks trade well above £5. When we use the stock screener to set £5 as the maximum amount to trade only penny stocks, Morningstar ratings do not appear. Unlike the stocks with higher prices, most of the penny stocks will not have any analyst followings.

How to Buy and...

Step 3 : Invest in Penny Stocks With Interactive Brokers

Even if the broker provides a profile, always check the stock profile directly on the OTC bulletin board. In this example, the stock is not compliant with securities regulations and is in bankruptcy.

How to Buy and...

Step 4: Click on “trade”

Finally, place your penny stock order and you will have successfully bought penny stocks.

Best U.S. Penny Stock Broker for 2020

Charles Schwab

Why Buy Penny Stocks on Charles Schwab?

Fees: $4.95 per share

Min Deposit: $1,000

Charles Schwab is the full service discount broker with a white shoe polish. Investors choose Charles Schwab for its reputation and fully automated-to-human advisory brokerage service options. The Schwab One® brokerage low flat fee includes professional research from Morningstar and Credit Suisse, and advanced charting. Schwab lists more than 6,000 OTC stocks. The user-friendly broker has smoothly integrated OTC stock research and buying into its main dashboard. Or you may choose to buy one of Schwab’s small cap ETF of index funds. Charles Schwab is also considered a valid platform for forex trading.

Our Rating

  • Flat trading fees
  • Over 6,000 OTC stocks to trade
  • Well-integrated OTC trading

    Best U.K. Penny Stock Broker for 2020

    Interactive Brokers

    Fees: $1 per share

    Min Deposit: $10,000

    Interactive Brokers is a full service online broker with low discount broker fees. The trading fee is low, starting at $1 per share, which is important if you are buying penny stocks in small volumes. Choose between a tiered or fixed rate plan. The fixed rate trading fee is 0.005 per share with a minimum of $1. IB SmartRouting ensures the best execution, meaning you are more likely to get the price you asked for.

    Margin requirements: Interactive Brokers has low stock borrowing financing fees, ranging from 3.90 percent (under $25k) to 3.02 percent ($3.5M). Stocks trading below $5 on an exchange are subject to the same margin requirements and fees as other exchange-traded stocks (Long positions: 30% or $2,000, whichever is greater. Short positions: $2.50 per share or 100% of the stock value, whichever is greater.) OTC stocks, including delisted exchange stocks, are not considered marginable and thus require a 100 percent margin to trade. However, Interactive provides access to ATSs like ArcaEdge, which may allow margin trading.

    Our Rating

    • Low trading fees
    • Large universe of OTC stocks to trade
    • Access to major OTC markets, including ATSs

      Where can I find penny stocks?

      The US markets are nirvana for a small company seeking to raise capital, but few can afford the high listing fees of the big exchanges or complexity of SEC securities registrations. Small companies around the world that dream of gaining access to the large pool of retail and institutional investors which trade US markets have another option – the OTC markets. These companies can gain an exemption from the regular cumbersome listing process by listing on the OTC markets.

      Investors must open a broker account with an online broker to access these small cap stock markets. Not all brokers will offer penny stocks or OTC trading. Penny stocks trade in the following markets:

      National Securities Exchanges – Stocks whose value have fallen below $5 are technically penny stocks. If their price falls below $1, though, they can be delisted from the large exchanges. Operator: NYSE, NASDAQ, and other large exchanges

      OTCBB – The OTC bulletin, operated by the securities regulator FINRA, lists OTC equity securities. Securities listed on the three large OTC markets operated by private firm OTC Markets may co-list on the OTCBB. Operator: FINRA

      OTCQX – You will find a menagerie of stocks here, ranging from well-known to newly formed companies with no revenues. Foreign blue chip companies wanting to access the US capital markets trade on the QX. They comply with US securities registration. OTXUS stocks cannot be penny stocks. Operator: OTC Markets

      OTCQB – The Venture Market is where early-stage and developing companies that do not meet full securities listing requirements trade. These companies are still required to meet regular reporting and verification requirements. A minimum bid of $0.01 must be met. Operator: OTC Markets

      Pink Sheets – The Pink Open Markets, known to traders as the pink sheets, list a wide variety of companies. You will find mid-caps and small caps , as well as companies that are bankrupt or delisted from big boards due to non-compliance with securities regulation. Companies self-list and do not adhere to full disclosure requirements. Operator: OTC Markets

      Gray Markets – These alternative trading systems (ATS) are OTC markets other than those run by OTCBB and OTC Markets. They have FINRA-assigned stock symbols and are required to report their trade data to FINRA. They include the NYSE-backed ArcaEdge, Citi Match and Chi-X Europe. Large institutional traders trade in these markets known as dark pools because the trading price and volume are not disclosed.

      As you can see, trading in penny stocks starts to get a little shady in the pinks and grays. Beginning investors should stick with the more closely regulated national exchanges, OTCBB and OTCQB markets.

      You may gain access to these markets through a licensed broker-dealer who acts as your counterparty and trades directly with these markets on your behalf. Alternatively, for expert traders, some brokers also offer an ECN service through OTC Link. An ECN enables you to trade directly with your trading counterparties and negotiate trades through instant messaging.

      Factors to consider when choosing a penny stock broker

      The challenge is, how to pick the few diamonds in the rough. Over 10,000 OTC stocks are listed, and many of them are penny stocks. Thousands more small cap issues are listed on major exchanges. The failure of small cap companies is high. While shopping for a penny stock broker, you can reduce risk by seeking the following features.

      • Regulated broker – Brokers must register with the Financial Industry Regulatory Authority (FINRA) to trade stocks on OTC markets.
      • Regulated OTC markets – OTCBB and OTC Markets boards are regulated, pricing is transparent and reporting and trading infractions publicly reported.
      • Choice of penny stocks – A large number of penny stocks makes it easier to develop a diversified portfolio. More importantly, the penny stocks should have good liquidity.
      • Transparency – Alternative trading systems (ATS), also known as dark pools, hide stock price and trading volume. These can be risky, murky places for beginner traders.
      • Fees – Low fees are more important when buying penny stocks. On cheap stocks, fees and commissions can easily eat away at your investment gains.
      • Penny stock surcharges – Some brokers will charge an extra fee to trade penny stocks.

      How to spot penny stocks on the rise

      Stock profiles provided by online brokers and investment sites (Yahoo, CBSMarketWatch, Bloomberg) are an important research tool for the DIY investor. Unfortunately, penny stocks are not widely covered by these investment sites or analysts. Other research sources exist. One of the most helpful is OTCBB.com, which has filled the void on info on penny stock investing. Here are ways to research penny stocks and find the best penny stock investments.

      • OTCBB – Go to OTCBB.com and click on the Directories page. Enter the symbol you want to research, or view a list of all OTCBB securities and click on the company you want to research.
      • FINRA – OTCBB operator FINRA provides key data on OTC stocks. Check out:
      • Trading Halts – Discover if a trade is subject to a ‘Halt’ or ‘Trade Resume.’
      • Market Statistics – Here, you will find data on the Top 100 Issues, Most Active By Share Volume, Gainers, Losers, and so on.
      • Short Interest Data – The number of stocks shorted is an important indication of market sentiment towards a stock. If there is a high number of short positions, the market sentiment is negative.
      • Online brokers – Some online brokers will provide stock profile pages for OTC stocks. The information is typically sparse compared to that provided for an exchange-traded stock, and may be limited to basic trading data. No credit ratings or analyst coverage will be available.
      • Company information – It is in the best interest of companies to take steps to communicate with investors, even if they are not required to file detailed financial reports. A company may voluntarily file additional information in financial reports, be audited on a regular basis, or have independent analysts provide reviews. A company planning a big board listing will accelerate steps to comply with exchange-listed stock requirements.
      Penny stocks have had a bad rep in the past. Regulators have placed a tighter safety net under OTC markets. These stocks still have lax reporting requirements compared to stocks listed on the big boards. If they do become insolvent or break investment rules, they could be tagged as a high risk stock, downlisted to the Pink sheets, or permanently delisted. While regulators cannot protect you from loss of capital, OTC stocks covered by FINRA are less likely to be investment scams.

      Best penny stocks to buy for 2020

      If you’re looking for hot penny stocks to buy, rest assured – we have compiled below a list of the top penny stocks on the rise for 2020 and 2020. These are penny stocks with a huge potential to increase in value in the coming months and we would recommend investing in them early before it’s too late.

      • Castle Brands (ROX) : This international marketer of premium alcohol beverages is said to be one of the best penny stocks to buy for 2020. Currently trading at only $0.58, the ROX stock has significantly increased in value in the past few days and we expect the upward trend to continue in the next coming months.
      • Sportsman’s Warehouse (SPWH): This outdoor sporting goods operates in 25 states in the U.S.A. The SPWH stock price shooted recently following a new credit card deal allowing their customers to sign up for a credit card through them. Currently at around the $5 mark, we expect the stock to rise consistently by 2021.
      • Limelight Networks (LLNW) : Limelight Networks is an internet content delivery provider which is still fairly new. With revenues for 2020 expected to increase by 1% and 12% by 2021, LLNW is definitely a penny stock to watch in 2020.

      Cheap penny stocks to buy

      If you’re looking to invest in penny stocks but have a very limited budget, we would recommend to go for penny stocks under $1. The following 5 penny stock investments are a great opportunity and are the cheapest in the market at this moment in time.

      • Sequans Communications (SQNS). Stock price $0.84
      • Tetraphase Pharameceuticals (TTPH). Stock price : $0.35
      • Surge Energy (ZPTAF). Stock price $0.97.
      • Trican Well Service (TOLWF). Stock price: $0.75
      • Scana (SCG). Stock price : $0.00

      What to look for in penny stocks?

      Stock symbol ending in ‘E’

      When an E appears at the end of an OTCBB traded stock symbol, it means the company has not met a reporting requirement. These companies will be listed under Delinquency Reports. The company can be delisted within 30–60 days if it does not comply.

      Stock symbol ending in ‘Q’

      How to Buy and...

      A company with a Q at the end of its stock symbol is in bankruptcy. It will also appear under the Bankruptcy list. This stock is a very high risk investment because it will be more difficult to sell and may not emerge from bankruptcy, but instead become defunct.

      A skull and bones

      How to Buy and...

      On OTC Markets, a skull and bones beside a stock is a warning the company is not in compliance with securities rules. Do further research to find out why.

      Bid-ask spread

      The spread is the difference between the bid and ask price. Penny stocks have wide bid-ask spreads.

      Trading halts

      Penny stocks are frequently subject to trading halts when they fall below minimum stock price thresholds, but they also frequently resume trading. Check the stock’s Trade Halt history on FINRA. A stock that has not experienced trade halts is less likely to be delisted than a stock with frequent trade halts.

      Conclusion

      Unlike stocks listed on major exchanges, penny stocks do not have to meet listing or financial requirements to get a stock symbol, nor are they subject to shareholder approval rules. The lack of disclosure significantly increases the investment risk of these speculative stocks. Investors should conduct extra due diligence to minimize the risk of loss of capital. We recommend users to do their research before buying penny stocks and research well the company as well as the broker they are looking to invest in penny stocks with. Although risky, penny stocks can be a great investment opportunity and have the potential to generate great returns.

      FAQs

      How much do I need to start investing in penny stocks?

      There is no minimum amount needed to invest in penny stocks. Online brokers will have a minimum deposit but some allow you to start trading with as little as $5–10. A high minimum investment may force you to invest an imprudent amount in penny stocks.

      Can I buy OTC stocks directly from OTC bulletin boards?

      To buy OTC stocks, you must open a broker account with a FINRA-registered broker-dealer. You can then trade OTC stocks in the same way you trade exchange-traded stocks. For expert traders, some brokers offer the option of trading directly with OTC counterparties through an ECN.

      Why do I not see the best bid and ask prices for an OTC stock?

      Markets in penny stocks can be very illiquid. To obtain a best bid and ask quote, two bid and two ask quotations are required. One-sided quotes are not uncommon.

      Is my investment safe on OTC markets?

      If you trade through a licensed and insured broker, you will have up to $500,000 in SIPC-backed insurance against losses on your investment account.

      What happens when my stock falls below $1?

      If you have invested in a NYSE or NASDAQ stock that falls below $1, the stock will be delisted from the exchange. The stock may then trade in the OTC markets.

      Are OTC brokers ethical?

      Penny stock markets have long been a target of illegal investing practices, including pump-and-dump schemes. To deal in securities listed in the OTCQB, OTCQX or OTC Pink boards, a broker must be registered with FINRA and the SEC. These brokers must comply with securitiess rules, including ensuring investors receive:Best execution Limit orders Firm quotes Short position disclosure

      What is an alternative trading system (ATS)?

      An alternative trading system (ATS) is an electronic OTC system that matches buyers and sellers of securities. They are also referred to as dark pools due to their lack of transparency as they mask the price and size of orders.

      See Our Full Range Of Investment Resources – Investments A-Z

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      All trading carries risk. Views expressed are those of the writers only. Past performance is no guarantee of future results. The opinions expressed in this Site do not constitute investment advice and independent financial advice should be sought where appropriate. This website is free for you to use but we may receive commission from the companies we feature on this site.
      Maggie Smith

      Maggie is an investment expert with 10 years experience in dividend stocks and income investing. She has a PhD in Financial Markets and Investment Strategies and has contributed to a number of financial portals, writing stock market analysis pieces and reports on technology stocks and IPOs.

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