Infographic
Feb. 6, 20206 min read

How to Select A Penny Stock Broker {INFOGRAPHIC}

stockstotradeAvatar
Written by stockstotrade

Ready to start trading penny stocks? Not so fast: Before you execute your first trade, you’ll need to find the right broker.

Download a PDF version for this post.

 

A broker is a party that facilitates trades on your behalf. This means that your penny stock broker is literally the gateway to making trades. However, not all brokers are created equal, so it’s important to take the time to choose one that is well suited to your trading needs and style.

As a trader, the right penny stock broker can help you make the most of every trade. But with so many different options out there, how can you choose which one is best for you?

To help you make a more educated decision, we’ve put together some of the most important considerations you should take into account when choosing a penny stock broker.  

Considerations When Choosing a Penny Stock Broker

When examining different penny stock brokers, be sure to consider these things:

1. Transaction or Commission Fee

Many brokers impose a fee or take a commission per transaction, whether you’re buying or selling.

While some brokers offer no-fee transactions, others may impose fees on every single one. While transaction fees are common enough, be aware that they can eat into your profits.

2. Annual Maintenance Fee

Before you commit, be sure to check if the broker in question charges a maintenance fee. The cost of maintaining a brokerage account can add up over time and eat into your potential profits!

3. Online Trading Platform

Put away those parachute pants! It’s not 1990 anymore. Today, online trading is a must. You need to be able to get live, up-to-the-minute pricing information and the ability to execute trades online.

Yes, there may still be times when you pick up the ol’ phone and call your broker, but these days, online brokers are the most practical and convenient type of brokerage account.

4. Minimum Account Balance

Is there a required minimum account balance? Every broker’s policy is a little different. Be sure to check on this, because if your account dips below a certain point, you could be subject to unwelcome fees.

5. Trading Frequency Requirements

Some penny stock brokers impose minimums on how many trades you must execute per month. If you don’t meet these minimums, higher charges or fees may apply. If you don’t think you’ll be trading frequently, avoid brokers with frequency requirements.

6. Withdrawal Charges

Some brokers will actually charge you to withdraw your own money! Be sure to check on a potential broker’s policy on transferring funds from your trading account to a bank account. Depending on how frequently you plan on making withdrawals, these fees could add up over time.

7. Volume Restriction

Some brokers allow you to trade unlimited shares without additional fees. But some brokers do charge more for large orders. When trading low priced stocks, you’re more likely to be trading a higher volume of shares, so it’s worth inquiring about volume restrictions with potential brokers.  

8. Brokerage Per Share Charges

Believe it or not, some brokers charge per share that you buy/sell. This means that your total buy and sell price will go up significantly and more money is going to the brokerage, leaving less room for profit.

9. Research and Analysis Tools

As a trader, it’s vital to have access to research and stock analysis tools. Some penny stock brokers offer these as part of their trading platform; others don’t.

Happily, StocksToTrade can help. While STT is not a broker, we recently unveiled broker integration.

This means that our platform can be used in tandem with many different brokers, or you can take advantage of our offer to create an account with Tradier. Read more about this exciting development in this post!

10. Speed of Trade Executions

Is your penny stock broker quick and reliable? If a broker’s website takes too long to respond, you might not be able to get in or out of a position when desired.

This might not be a big deal for one trade, but over time, it can really add up. Having a fast, easy and secure means for placing trades is a big asset when looking for a broker.

11. Inactivity Fee

If you don’t think you’ll be trading actively on a regular basis, look into a broker’s policies regarding inactivity. Some brokers may charge fees if your account is inactive for long periods of time.

12. Short Selling Restrictions

Some brokers have restrictions that are specific to short selling. For example, you may have to maintain higher margin amounts for the short positions. A few brokers may even disallow short selling in penny stocks entirely.

These are risk management measures specific to each broker. If you intend on short selling, familiarize yourself with any restrictions you may face.

13. Depot and Nostro Facilities

Be sure to choose a broker offering both depot and nostro facilities. In case you’re not familiar with the latter term, “nostro” means that the bank holds an account in foreign currency in another bank.

This bank integration on the broker’s part will make transfers and investments far easier, and maximizes your trading capabilities.

14. Surcharges for Low Priced Stocks

There can be an added cost to low priced securities, in addition to the broker’s standard commission. Since penny stocks are extremely low priced stocks, brokers with a surcharge and go with one that charges a flat commission.

What qualities do YOU look for in a broker? Leave a comment below!