Where Not To Buy Penny Stocks Based on Commissions
Finding out where not to buy Penny Stocks based on commissions could mean a savings of several thousand dollars each year, depending on how many trades you place and how many shares.
First of all, what are Penny Stocks? The answer to this can be different for each person, so coming up with the meaning to yourself is the first step prior to deciding where to buy and sell them.
Many people consider these to be any stocks that trade under $5.00, some under $2.00, and then some consider only stocks actually trading under $1.00. Even at stocks that trade under $1.00, you'll find some that trade at $0.70 or $0.80, and then you'll come across some that trade at $0.001 (and there are many of these out there).
The reason why defining what Penny Stocks are is so important is because as an individual investor (rather trader), you'll have to open up an account with an online broker to place your trades. Fees and/or commissions between brokers vary, and in some cases vary widely.
Many online brokers advertise a low flat fee commission to entice new customers. Just like everything else in the world though, you need to get used to reading the "small print". A lot of the advertised low commissions do NOT include low priced stocks.
Here's an example: Scottrade advertises $7.00 Stock Trading all the time. Take a look at one of the images I captured from their website below:
Now look at the next screen capture below which I took from the "Commission Schedule" page of their website. Notice the first sentence below the "various prices" for stock trades in particular:
For stocks priced under $1, add 1/2% of the principal value to the commissions shown. Some foreign and pink sheet Stocks must be traded with broker assistance.
Let's use a fictious trade as an example and see how much the commissions could wind up costing someone: Stock XYZ is trading at $0.50 and we have $10,000 that we want to purchase shares with. $10,000 divided by $0.50 equals 20,000 shares that we can purchase. (Wow! That's a lot of shares...)
We place our order online using our Scottrade account, the order gets filled. We have a commission of $7.00 PLUS our stock is under $1, so we also have to add 1/2% of the value of the trade, which in our case is $50.00. Our commission to buy these shares comes to $57.00. When we sell, if prices are at $0.50, our commission to sell our shares would come to another $57.00.
If we place 3 trades like this each week, times 50 weeks, we'll have spent $17,100.00 in commissions. If we instead used a broker that charges a low flat rate for low priced stocks as well, we could save a lot of money. If we paid a flat $7.00 per trade, we would only have spent $2,100.00 for the same 3 trades per week x 50 weeks, a savings of $15,000 in a year. That's a big difference. Have you learned where not to buy Penny Stocks yet?
So when choosing an online broker and where not to buy Penny Stocks, always consider the commissions before making a final decision. There are many good brokers to choose from without excessive fees in comparison with one another.