How to Trade Penny Stocks Using Mobile Apps
If you are a high-flying risk taker, investing in penny stocks might be an investing option to consider. Purchasing shares in these small companies involves a lot of risk – in fact, it is not unusual to lose your entire investment if a company fails to survive. But the rewards can be great for some investors.
Read on to learn more about the pros and cons of investing in penny stocks.
What Are Penny Stocks?
Penny stocks are tied to companies with very low market capitalizations, typically less than $250 million or $300 million, according to the U.S. Securities and Exchange Commission. Technically known as “microcap stocks,” they represent some of the smallest of public companies. If a company has a market capitalization of less than $50 million, it may be dubbed a “nanocap stock.”
The SEC warns that buying penny stocks can be very risky. These types of stocks often trade infrequently and can be difficult to sell. Finding quotations for penny stocks can be challenging, which makes it difficult to assign them an accurate price.
Whenever you buy a stock, there is a risk that you could lose money. But the SEC notes that with penny stocks, you must be especially prepared to lose your entire investment.
Check out some of the top investment firms and learn how they can help facilitate your investing.
How Are Penny Stocks Different From Other Stocks?
Penny stocks can be quite different from other types of stocks. Overall, investing in penny stocks often is riskier than investing in the stocks of larger companies. These companies tend to be new and are not firmly established, the SEC notes.
Characteristics of penny stocks that separate them from stocks of larger companies include:
1. Public information is scarce
It can be difficult to find public information about these very small companies. The SEC notes that this is often the biggest difference between microcap stocks and stocks of larger companies.
For example, you may struggle to find the types of reports that larger companies regularly file with the SEC. In addition, professional stock analysts may not often research or write about these companies. This lack of information makes it less likely that quoted prices for these stocks are based on accurate information.
3. Listing standards do not apply
A larger company must meet minimum listing standards before listing its stock on an exchange. These include having minimum amounts of net assets and a minimum number of shareholders.
Because penny stocks are traded over the counter, there are no minimum listing standards for these very small companies.
4. It’s harder to trade shares
Penny stocks have low liquidity, which can make it difficult to sell them quickly. That means you can be stuck longer with a losing stock, and might lose more money on your investment as a result.
5. Price movements are more volatile
Penny stocks tend to see wider swings in their pricing over shorter periods when compared to stocks of other types of companies. Understanding this fact is particularly important, since you may have a tougher time quickly selling your shares.
6. Fraud and misinformation risks are higher
Penny stocks are more vulnerable to investment fraud schemes. Because these stocks have a lower public profile than bigger companies and do not trade on national exchanges, they are likely to receive less regulatory scrutiny. This means “buyer beware” applies especially to these investments.
How Much Does It Cost to Trade Penny Stocks?
Penny stocks typically are cheap to buy, often less than $5 a share.
A growing number of brokers now charge no fees when you buy penny stocks via online trading. Vanguard, Fidelity, Charles Schwab, and TD Ameritrade are just a handful of the firms that offer this service.
You may pay more at some firms if you want to trade via the phone. For example, most Vanguard clients must pay a $25 broker-assisted fee when trading by phone.
Other brokers may offer their own fee schedules. For example, Interactive Brokers offers tiered pricing. Depending on the type of service you choose, trading may either be free or based on a per-share charge.
Can You Make a Lot of Money With Penny Stocks?
With penny stocks, you often buy a company near the beginning of its journey in the marketplace, and you typically pay a low price. Because of this, it is possible to buy a penny stock and see the share price grow tremendously over time, which can earn you a decent profit.
Where Can You Trade Penny Stocks?
If you decide to take the plunge into penny stock, plenty of brokers can help you make trades. But a handful of online brokers might be especially good choices. These companies – all of which have brokerage apps — include:
Charles Schwab. In addition to not charging commissions for online trades, Charles Schwab offers an app that allows you to use your finger, face ID, or a preset passcode to check your account. You can also make trades with the app. And as we have noted, this firm can make sense for investors who want access to premium-quality research.
Fidelity. Fidelity does not charge commissions for online trades. Download the Fidelity app and you can get quotes on Amazon Echo. Just ask Alexa for a quote at any time. MoneyRates has reported that Fidelity is known for its “efficient trading execution, low-expense mutual funds, top-notch research, and tools.”
TD Ameritrade. MoneyRates has noted that TD Ameritrade does not charge commissions on online trades. It also does not charge monthly account maintenance fees and has no minimum account size. It also lets you trade via an app. You can even use the app to get detailed stock quotes and track the market through your Apple Watch.
T. Rowe Price. Another firm that does not charge for online trades, T. Rowe Price also offers an app that lets you do everything from viewing account balances to making trades and researching investments. As MoneyRates noted in its review of T. Rowe Price, it has “one of the cleanest disclosure records of all the brokerage firms.”
Vanguard. Vanguard does not charge commissions for online trades, and is known for its rock-bottom fees. The company is rolling out a new app called Beacon that will allow you to “view your accounts, track performance, and perform some transactions.” Need a little guidance with your investing? Vanguard has one of the lowest management fees for an online planning service.
Who Should and Should Not Trade in Penny Stocks
Only investors with a strong stomach for risk should consider investing in penny stocks.
Many experts urge investors to understand that buying penny stocks typically is much riskier than buying stock in more established companies. While a small company can disappear overnight, that is an unlikely outcome for a behemoth like Walmart or McDonald’s.
If you purchase shares of penny stock in a company that does not survive, you could lose your entire investment. For this reason, you should think carefully before investing in penny stocks. And putting such stocks at the core of your investing approach is very risky.
However, if you understand and accept the high level of risk associated with these stocks, you may want to take a chance on these stocks, as they offer the potential of outsized rewards for some lucky investors. Just understand that for many other investors, buying penny stocks will be a money-losing venture.
Pros and Cons of Penny Stocks
Pros
Penny stocks have tremendous upside potential. By purchasing these shares, you get in on the “ground floor” of a small company near the beginning of its growth journey. These stocks also are cheap to buy. If all goes well and the company becomes a big success, you could make a lot of money.
Cons
However, such an outcome is the exception to the rule. About two-thirds of businesses with employees survive at least two years, and roughly half survive at least five years, according to the Small Business Administration. If you invest in a company that fails, you could lose all the money you invested.
Frequently Asked Questions
Can I lose all my money buying penny stocks?
The risk of losses — even a total wipeout of funds — is high for those who invest in penny stocks. Many of these companies are doomed to fail, taking your investment with them. Only those with a high appetite for risk should consider investing in penny stocks.
How can I tell if a penny stock is connected to fraud?
The SEC notes that fraudsters can more successfully manipulate penny stocks than other kinds of stocks. Some warning signs that might indicate a fraudulent situation include:
- A history of SEC trading suspensions on the stock
- Excessive “hype” about the stock’s promise in emails and text messages, and on social media sites
- Dramatic increases or decreases in the stock’s price for no apparent reason
- Insider ownership of large amounts of the stock
What is a “pump-and-dump” scheme?
Penny stocks can be susceptible to “pump-and-dump” schemes in which fraudsters buy a stock, promote its virtues publicly, and then sell it as soon as the price jumps, leaving other investors holding the bag and suffering big losses.
