Which broker should I choose? How do I buy shares of penny stocks? Can I invest in companies that trade overseas?

Without a doubt, the most common reader questions we get here at the Penny Sleuth are about brokers. That’s really no surprise – for a new investor the broker business is one of the most complex parts of the investing process. But that’s only because, all too often, new investors don’t understand these “Broker Basics.”

Here’s a look at what you need to know about the brokerage world to make profitable investment choices…

Imagine sitting in front of your computer as a new investor with a phenomenal investment idea – a stock with a groundbreaking product that’s about to take off, no debt, and an undervalued share price. It’s an investment that could easily double this year.

But actually parlaying your money into your dream pick isn’t necessarily so simple — the brokerage business is mired in complicated terminology, intimidating risks, and bureaucratic red tape, after all. That’s about to change for you…

A Look at the Brokerage Business

There’s no question that all brokers aren’t created equal. In fact, picking one broker over another could end up saving you – or costing you – a serious chunk of your investment gains. But that said, their jobs are all essentially the same.

Brokers are middlemen who execute orders for stocks, bonds, ETFs, and other securities for their clients. In their simplest form, brokers make their living by charging a commission for every trade they put through for you. Keep that fact in mind – most brokers have a vested interest in seeing you churn your portfolio and pay-up big commissions in the process.

Picking a reputable broker usually isn’t something you have to worry about. Brokers are regulated by the Securities and Exchange Commission (SEC), which keeps a public directory of brokers, as well as any complaints against them.

The Securities Investor Protection Corporation (SIPC) protects brokerage accounts of up to $500,000, just as the FDIC insures your checking account. And while that doesn’t mean that you can’t lose money when a stock price falls, it does mean that your portfolio is protected from being looted by your broker.

That’s not to say that dishonest brokers are common – even the brokerage arm of Bernie Madoff’s firm was a legitimate business, one that was recently sold off to another broker-dealer to scrounge up more funds for Madoff’s investment advisory victims.

The bottom line is this: by ensuring that your stock broker is registered with the SEC and is a member of the SIPC, you all but eliminate the risk of being scammed by your broker.

If you want to find the best bargain in brokerage, take a look at the Penny Sleuth’s 2009 Broker Guide.

The Tricks to Trading Penny Stocks

In this day in age, there’s very little reason to pick up the phone to call your broker anymore. That’s because in the last two decades, online trading has emerged as an inexpensive, reliable, and efficient way to execute stock trades. Every major brokerage firm offers online trades – if yours doesn’t, consider that a major red flag.

Talking to a broker in person may be a good way to assuage your pre-trade anxiety, but it’s also a great way to smash your investing profits from the start. Phone orders can typically cost 400% more than online orders for a service that provides almost no benefits over online trades.

Many investors are concerned that they won’t be able to trade penny stocks without consulting their brokers by phone. But that’s simply not the case.

Online brokerage platforms give investors the opportunity to pick up shares in major listed stocks, as well as penny stocks that trade on the pink sheets or over the counter. If you’re having trouble finding a particular penny stock, feel free to call your broker for assistance, but by all means, execute the trade online and avoid the huge phone commissions.

Final Thoughts

Some of the most exciting small-cap opportunities right now are in foreign stocks. And as with penny stocks, you can buy or sell shares of foreign companies completely online through your broker.

If you live in a country other than the United States, however attempting to open a U.S. brokerage account could entail quite a lot of paperwork. The Patriot Act severely tightened banking and investing laws, and as a result financial institutions are required to know exactly who their clients are as well as where their money is coming from in order to curtail money laundering. That said, brokers in nearly every other country have access to U.S. exchanges, though their regulation may not be as stringent as it is here.

For the vast majority of investors, selecting the right broker is merely a matter of personal preference. As long as your broker is kept in check by the SEC and insured by the SIPC, you don’t need to worry much about the safety of your money. But your money can evaporate pretty quickly if you’re handing over outlandish commissions every time your place a trade.

Don’t be tricked into thinking that you can’t execute complicated orders for obscure stocks online – you can. And it’ll save you a fortune in trading fees.

Cheers,
Jonas Elmerraji

August 27, 2009

Jonas Elmerraji

Jonas Elmerraji is an editor of Penny Stock Fortunes and a frequent contributor the Penny Sleuth. Jonas also occasionally writes for financial publications like Forbes, TheStreet.com, and Investopedia. He has been quoted as an investment expert in Investor’s Business Daily, Consumers Digest, and Bankrate.com among others. Before joining Agora Financial, Jonas’s held positions at an investment firm and at a “Big 4″ public accounting firm. He holds a degree in Financial Economics.

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