Penny stock brokers can give you tips – some of which can be harmful to your investment career
Most stock brokers are commissioned sales people who make investment recommendations that you can accept or reject, and penny stock brokers are no different. There’s nothing inherently wrong with this arrangement, of course. But it can introduce conflicts of interest that can influence your broker’s recommendations, and you should be aware that this might not always work in your favour.
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The best penny stock brokers aim for growth, not stability
To offset the potential risk of stock market downturns, bad brokers, including penny stock brokers, have supposedly designed sophisticated strategies that bring greater portfolio stability.
However, this kind of stability costs money. It can virtually eliminate any chance of a significant long-term profit.
Some of these stabilizing but profit-killing strategies involve buying or selling stock options, or stop losses, and so on. Others focus on “structured investments”.
Good brokers have no need to offer schemes and services to their clients. They offer clear strategies and straightforward advice that serious investors find refreshing.
Good penny stock brokers don’t engage in frequent trading
Some trading suggestions will inevitably make money. But as a rule, active trading generates high commissions for the stock broker, and weak profits, or even losses, for the client.
Bad brokers exploit this situation by churning their clients’ accounts—carrying out short-term trades, sometimes without the client’s express consent. This generates big commissions for the broker, and can temporarily pay off for the client when the market is soaring. But it eventually backfires, and the client loses money.
Know the risks of online trading with penny stock brokers
Online trading with discount brokers may look like a fairly quick and convenient way to build wealth, but there are many hidden dangers that may not be evident at first.
The main risk comes from the fact that it all may seem deceptively easy. The lower costs and higher speeds of online trading can lead otherwise conservative investors not to mention aggressive investors, to trade too frequently. That can lead you to sell your best picks when they are just getting started.
The apparent ease of online trading may even prompt conservative investors to take up short-term trading or day trading. That’s just another danger of trading stocks online—there’s a large random element in short-term stock-price fluctuations that you just can’t get away from.
This random element can be profitable for short periods. But you can’t reliably profit from it over the long term. In fact, most short-term traders wind up losing money. By the time their beginners’ luck fades, many are trading in dangerously large quantities.
Frequent trading can also lead you to buy lower-quality, thinly traded stocks. The danger arises from the fact that the bid and ask spreads of many of these investments can be so wide that the share price will have to go up significantly before you’ll even begin to make money on a sale.
You can make trades quickly in online trading. However, for successful investors, this is a bonus, not the object of trading stocks.
Understanding jargon used by penny stock brokers is important
Every industry and group has its own special jargon. This specialized language always has the same purpose. It simplifies communications within the industry, and helps make insiders feel they are part of a tightly knit community. It also helps the group pursue its goals. It shapes concepts that will establish lines of thought and discussions that match the industry’s view of the world. But it can be confusing for those who are not insiders in the group.
You may have noticed that your broker sometimes uses unfamiliar words and phrases to describe investment concepts. Some of this stock broker jargon is simply shorthand that brokers use amongst themselves, to refer to familiar situations without having to go into any detail on the underlying concept. However, the concepts that these “broker-ese” words and phrases represent do have the effect of furthering the goals of the brokerage business.
If you find yourself thinking in broker-ese, you’ll naturally make assumptions that are in tune with the goals of your broker, and may be out of tune with yours.
What’s an example of the strangest “broker-ese” you’ve received that caused you to turn and run in the opposite direction?
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