How to buy and sell penny stocks

Buying penny stocks on the LSE

The first thing you should know when you want to buy or sell a penny stock, is that they are traded in the same way as larger, ‘blue-chip’ stocks that you may already be familiar with.

So, first things first, you need a stockbroker.

There’s a wide selection of brokers to choose from, and competition is fierce, so it’s worth shopping around to find the one that best suits your needs. I’ll come back to how to choose the right one in a moment. For now, let’s focus on the best bit – how to buy a stock you’re interested in.

6 Best Penny Shares to buy Now

These days most investors trade online. It’s simple, efficient and fast, and putting the whole process online has slashed the cost of dealing substantially. It’s very easy to set up an account with one of these brokers, and most will take you through the process in an easy to understand way from beginning to end.

Of course, you can still speak to a broker – phone dealing is perfectly possible, though it’s often more expensive. And you may occasionally have to speak to a broker anyway, if systems are down for maintenance or if you would need to be able to check on the availability of a stock.

It can be daunting to talk to an industry professional – especially if you’re new to investing. What you need to remember is that you are the customer – by law, it’s the broker’s job to get the best deal available for you. So don’t worry about asking what seem like silly questions – it’s the only way to learn. An example trade

Whether you deal online or via telephone, once you have instructed your broker to buy, they will go to the market to find you the best deal. They go to companies known as ‘market makers’, which are essentially middlemen between buyers and sellers, who set the prices of stocks.

If you’re dealing over the phone, a conversation between you and your broker might go something like this – but in effect, when you trade online, you’re doing exactly the same thing:

Broker: “Good morning, sir/madam. Could I have your account number, please?”

You: “It’s 123456789.”

Broker: “Thanks. And how can I help you today?”

You: “I’d like to buy stocks in XYZ company.”

Broker: “Of course. Just a moment… The best price for XYZ is 110.4p to buy.”

At this point, you need to decide whether or not you want to go ahead with the purchase. Is that the price you were expecting to pay? If not, it’s OK to back out now. You don’t need to justify it – if you change your mind for whatever reason at the last moment, you can say “no thank you” and ring off.

NB: Do be absolutely certain that you want to make the purchase before you confirm, because you will be entering into a verbal contract to buy the stocks and won’t be able to back out of the deal later.

You: “OK, I’d like to buy 500 stocks at that price please.”

The broker will then confirm the number of stocks you want to buy, and the final cost.Broker: “That’s 500 XYZ stocks at 110.4p, at a total cost of £562 including commission and stamp duty. Would you like to go ahead?”

You: “Yes please.”

Broker: “Right, that’s 500 XYZ at 110.4p – that’s gone through for you now. The contract note will arrive in your email inbox shortly and in the post in a few days.”

You: “That’s great, thanks. Goodbye.”

Broker: “Thank you, sir/madam. Goodbye.”

A contract note will contain all the details of your purchase or sale – such as quantity of stocks, currency of transaction, commission, settlement date, which dealing account, etc. Keep this for your records.

If you are dealing on an online platform, the process is slightly different. In this case, you will put either the fund’s name, or company’s name, or its ticker symbol (the 3-4 characters by which it’s known, eg Apple is AAPL), into your platform’s search bar.

Then you will see an option to buy or sell the share – either a certain quantity (eg 200 stocks) or to a cash value (eg £500 of stocks).

Follow the instructions on screen to complete your purchase or sale.

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Where and when can I buy and sell penny stocks?

As a potential penny stock investor, you may be looking at the Alternative Investment Market, or ‘Aim’, where many smaller stocks are listed.

This is a sub-market of the London Stock Exchange, where you can trade stocks between 8am and 4:30pm, Monday to Friday.

A word of warning: if you place an order outside of these hours, it won’t be transacted until the markets reopen. A few hours can be a long time in the stockmarket – particularly when dealing in penny stocks – so it might be worthwhile setting an upper limit on the price on you’ll pay. This is known as placing a ‘limit order’, where you agree to buy or sell a set number of stocks at a specified price (or a better one).

During trading hours, you can put in a ‘market order’, which will simply get you the best price available in the market at the time. Which type of broker is right for me?

There are three main types of brokerage account. They have technical names, but the differences between them are quite simple.

Your cheapest option is an execution-only broker, where the broker buys and sells stocks based on your instructions, but doesn’t make any recommendations.

If you’re willing to pay more, you can get a service where the broker also gives you some advice on which securities to buy. This is known as an advisory broker.

Finally, for higher charges still, there is a service where the broker handles all of your investments on your behalf. These are discretionary brokers.

Here are the main points to remember with each: Execution-only

An execution-only broker does not offer any investment advice, so they will not give you their view as to whether they think that a particular security is suitable for your needs. You simply instruct the broker to carry out a sale or purchase, and they will do so on your behalf, no questions asked.

The upshot of this is that you will not pay a great deal for the service. While they don’t give explicit investment advice, execution-only brokers will still usually provide resources such as investment tools and historical stock data on their websites, which you can use to research and make your own decisions. Advisory

In return for a fee, you can use the services of an advisory broker. These differ from execution-only brokers in that they will advise you to buy and sell certain securities in line with your investment goals.

In most cases, an advisory broker will ask you to come in for an interview or to fill out a questionnaire to establish your goals, income and commitments, and attitude to risk.

There are two main types of service: either the broker will know all about your investments and advise on them as a whole, or give specific buy/sell advice on the individual stocks that you suggest. Discretionary

The most expensive of the three services, a discretionary account allows your broker to buy and sell stocks without your consent. Typically employed by very wealthy (‘high net worth’) individuals, a discretionary broker buys, sells, advises on and manages your stockmarket investments totally.

Similar to an advisory broker, you inform the broker what your goals are via an interview or questionnaire. Then you give him or her the authority to act on your behalf, meaning subsequent investment decisions are made at the discretion of your broker – hence the title ‘discretionary’.

Do bear in mind that while getting advice might seem like a good idea, these people do not necessarily have any better idea of a company’s prospects than you do, and they certainly don’t have insider information (which would be illegal). So paying for advice or for a professional to manage your money entirely does not necessarily confer you any advantage over the execution-only option – in fact, the higher costs for the other two options means your investments will have to outperform substantially to justify those fees.

Whichever account you choose, make sure you are fully aware of all the potential costs associated, as these may not be clearly marked in marketing material or sales brochures.

For example: Is there a fee if you are inactive for a period? If so, how long? How much?

Is there a monthly subscription charge?

What’s the annual fee?

Can you deal in overseas stocks? What’s the commission? Is it a flat fee or percentage-based?

Will you hold the share certificates yourself, or have a nominee account?

Let’s tackle that last point now. What is a nominee account, and do I want one?

In the past, an investor would always receive a share certificate when buying a share. This certificate would record that person as the registered owner of stocks in a certain company.

Over time, however, the paperwork this entailed became a burden – so now, in the vast majority of cases, your investments are held in the name of your broker’s ‘nominee company’.

While the nominee company is the legal owner of the stocks, the company’s records will name you as the ‘beneficiary’, meaning that you retain actual ownership.

This is a convenient system, particularly for your broker, which no longer has to deal with sending out paper certificates, and can simply add your name to electronic records.

From your point of view, nominee accounts allow you to avoid share registration costs, and you don’t have to keep your certificates safe.

But it’s not all good news. Holding your stocks in a nominee account means that your name won’t appear on that company’s shareholder register – so you may miss out on shareholder meeting invitations, product discounts and other minor perks.

If this is an important consideration for you, it’s worth shopping around to see if there’s a broker that will help you get the perks that you’re due as a shareholder. What do you recommend?

We’d suggest that for most beginner investors in penny shares, a nominee account with a low-cost, execution-only broker, is the most sensible option.

This is a ‘do-it-yourself’ account with low costs, where you don’t have to spend any time managing your share certificates or talking to an adviser.

A reminder of some things to consider when opening your account: Are you going to invest in individual stocks, exchange-traded funds (ETFs), actively-managed funds, or a mix? There is no ‘best’ broker for all options

What are the dealing fees?

Is there a minimum number of trades per month? A fee if you don’t make enough?

Does it cost to reinvest your dividends? How much?

Are there exit fees?

Is it a reputable company?

Does it have good customer service?

Once you have considered what’s important to you, have a look at our broker comparison table below to see which service is best for you.

Broker Isa charges Sipp charges Fund charges UK share charges
AJ Bell Youinvest None None 0.25% per year on first £250,000 of funds, 0.10% per year on the next £250,000 to £1m and 0.05% per year on the next £1m to £2m. £1.50 per trade 0.25% per year of value of shares capped at £25 per quarter for SIPPs and £7.50 per quarter for ISAs. £9.95 per trade.
Alliance Trust £18.75 per quarter £155+VAT £12.50 per trade £12.50 per trade
AXA Self Investor None Not available 0.35% per year, reducing to 0.2% on whole balance when over £250,000 Not available
Barclays Stockbrokers £15+VAT every six months. Waived if you only hold funds £38.75+VAT per quarter 0.35% per year (min £35) up to £500,000. No further charge above £11.95 per trade
Beaufort Securities None £160+VAT per year Not available £8 per trade. Charges handling fee of 10% of every dividend (min 25p max  £1)
BestInvest 0.4% per year up to £250,000, 0.2% £250,000-£1m. No further charges above 0.3% per year up to £250,000, 0.2% £250,000-£1m. No further charge above None £7.50 per trade
Cavendish Online None Additional 0.05% per year on top of standard fund charge 0.25% per year Not available
Charles Stanley Direct None £100+VAT 0.25% per year up to £500,000, 0.15% £500,000-£2m, 0.05% above £2m 0.25% per year (min £20 max £150), waived if 6+ trades every six months. £10 per trade
Clubfinance Frequent Trader 0.24% per year (min £30 per quarter) 0.24% per year (min £30 per quarter) None £2.50 per trade
Fidelity None None 0.35% per year (min £45), reducing to 0.2% on whole balance over £250,000. No further charge above £1m Not available
Halifax Share Dealing £12.50 per year £22.50 per quarter under £50,000, £45 per quarter above £12.50 per trade £12.50 per trade
Hargreaves Lansdown None None 0.45% per year up to £250,000, 0.25% £250,000-£1m, 0.1% £1m-£2m. No further charge above £2m 0.45% per year (max £45 in Isa, max £200 in Sipp). £11.95 per trade
HSBC Share Dealing £10.50 per quarter. One fee covers both Isa and standard dealing account Not available Not available £10.50 per trade
iDealing £5 per quarter Varies with Sipp administrator None. Restricted list of fund families available £9.90 per trade
IG Inactivity fee of £12 per month if no trades for  two years Not available Not available £12 per trade
Interactive Investor £20 per quarter (includes £20 of trades). One fee  covers all your accounts Additional £80+VAT per year £10 per trade £10 per trade
iWeb Share Dealing None (£200 account opening fee) £22.50 per quarter under £50,000, £45 per quarter above £5 per trade £5 per trade
Saga Share Direct None. Available to over-50s only Not available 0.35% per year (min £35) on account balance up to £500,000. No further charge above £11.95 per trade
Saxo Capital Markets £35+VAT per year. Custody fee for 0.12% per year (min €5 per month). Minimum account size of £6,500 Varies with Sipp administrator Not available 0.1% (min £8) per trade
Share Centre £8.75+VAT per quarter inactivity fee (if you don’t trade). One fee covers all your  acounts £99+VAT per year No fee for fund purchases, £12.50 for sales £12.50 per trade
Stocktrade £4+VAT per month £12+VAT per month 1% per trade (min £7.50) or pay £20+VAT per quarter “dealing option” fee and £7.5 per trade 1% per trade (min £7.50) or pay £20+VAT per quarter “dealing option” fee and £7.5 per trade
SVS Securities None Not available Not available £7.95 per trade
TD Direct Investing £30+VAT per year, waived for accounts over £5,100 and regular investments 0.5%+VAT per year (min £80+VAT, max £200+VAT) 0.35% per year (max £1,750) £12.50 per trade
X-O None £120+VAT per year Not available £5.95 per trade

And remember, if you are at all unsure about investing, there’s always the option to seek independent financial advice.

Finally, bear in mind that there are risks to investing in penny shares. There can often be a large ‘spread‘ – that is, the difference between how much you have to pay to buy it, and how much you can sell it for.

Small company stocks can also be quite illiquid – meaning that there often aren’t a huge number of buyers, or many stocks traded. It could be difficult to convert your investments into cash in an emergency.

Still, investing in penny stocks can be exciting and profitable. Now you know the basics, you might be ready to make a few investments of your own.

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Unlike penny shares, cryptocurrencies involve no brokers, making it much easier to buy and sell your investments yourself.

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Nick O’Connor

Exponential Investor

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Category: Buying Aim Shares

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