Online penny stock brokers vary from ultra cheap and straight forward services to expensive brokers who offer comprehensive support and guidance. I will summarize the different categories and when you should go with a specific category. I will also help you identify the specific fees that apply to penny stock trading.
Keep in mind that trading penny stock often involves an extra charge or at least a different fee structure. So don’t just look at a broker’s basic structure and fees; specifically look for how they handles penny stock trades. In some cases, you won’t see penny stocks identified. You might also see them referred to as micro cap stocks or nano stocks.
However, you can still identify how a broker handles penny stock trades by spotting trades with the Pink Sheets and the OTCBB (Over-the-Counter Bulletin Board). You may also see different charges for stocks under a $5 per share, which usually indicates a penny stock fee.
Will you be day trading? If so, to trade on margin be prepared to pony up a $25,000 starting balance. This is enforced by the SEC (Securities and Exchange Commission), so if you find a broker willing to skirt this rule, run fast the other way.
Discount brokers will offer lower fees and less of a discrepancy between standard trades and penny trades. Quality discount brokers include services like E*Trade, Zedo, LowTrade and ChoiceTrade. Don’t expect a lot of help from these services. Some of them provide great tools and resources (like E*Trade), but you have to utilize them yourself. Despite the allure of low fees, I urge you to only move to a discount service once you’ve gained significant skill and experience in this industry.
Brokers Who Offer Both Discount and Full Service
Some full-service brokers kind of ride the line between being full-service brokerages and discount brokers. What this means is that they offer inexpensive trades (though maybe not quite as cheap as some true discount brokers) but also more expensive service for investors who desire greater assistance and service. Brokers like this include ING’s ShareBuilder and TDAmeritrade.
Then you have true full-service brokers. If you’re new to investing, I encourage you to stomach the extra expense of working with a full-service broker as you learn the ropes. Vanguard, Fidelity and Charles Schwab are quality examples in this category. These brokerage firms will offer you guidance and hands-on assistance in determining your investment strategy. If you dream of working entirely on your own and you desperately want to avoid high fees, I still encourage you to start with a full service broker to build a solid foundation of experience and knowledge.