How to buy and sell penny shares

Small-cap stock expert David Thornton explains the ins and outs of investing in penny shares.


How to buy and sell penny shares
(Image credit: Getty Images/iStockphoto)

When you want to buy and sell penny shares, you have to go through a stockbroker just like if you were investing in larger companies. First of all, you'll need to set up an account. This is easy to do and with plenty of brokers competing for business, you have lots of choice. I'll explain how to choose a broker below. For now, let's look at the exciting part how you actually place an order.

An increasing number of private investors now place their trades online. This is very efficient, and fast. It has also dramatically cut the cost of dealing in recent years. Dealing live over the internet is very easy and is usually the cheapest option. Most online brokers have easy-to-follow systems that guide you through the process from start to finish.

But it's entirely up to you how you deal some people like to speak directly to another person; other people prefer the internet. Even if you do most of your dealing online, you will occasionally have to speak to a broker for example if the systems are down or if you want to deal in a larger number of penny shares than the maximum shown on the screen.

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If you tell your broker to buy a particular share, they will look for the latest prices from firms called market makers', and purchase your shares at the best price they can get. By law brokers are obliged to get you the best price available.

It is important to remember this the broker is your agent and is on your side. You are the customer; so don't be intimidated or frightened of asking simple questions.

A typical conversation when you deal over the phone would go like this:

Broker: "Good morning, Sir/Madam. Please could you give me your account number."

You: "It's XXXXXXX."

Broker: "Thank you. And how can I help?"

You: "I'd like to buy shares in XYZ Company. What is the price?"

Broker: "Let me just see XYZ Company? The best price is 86.5p to buy."

You can now decide whether you want to go ahead if you don't like the price offered, or you just change your mind at the last minute, you can say "No, thank you".

Let us assume that you do want to go ahead.

You do need to be absolutely certain, because you are entering into a verbal contract to buy the shares and you will not be able to back out of the deal once you have committed yourself.

You: "OK, yes, I'd like to buy 600 shares at 86.5p please."

The broker will then confirm the number of shares you want to buy, and the cost.

Broker: "That's 600 XYZ shares at 86.5p, total cost including commission and stamp duty, £534. Would you like to go ahead?"

You: "Yes please."

Broker: "Thank you. That's 600 XYZ at 86.5p - the deal's now gone through for you. The contract note will be with you shortly."

You: "Thanks very much. Goodbye."

Broker: "Thank you. Goodbye."

Your broker will then send you a contract note through the post or online, which gives all the details of your transaction.

The contract note also tells you the date by which you must pay for your shares (many discount brokers want money deposited in your account before dealing). You must pay by the settlement date or else the broker will have to sell the shares again at whatever price he can get. UK shares settle three days after the trading day (T+3 in the jargon).

To sell shares, you go through the same process except of course that this time you want to get the highest possible price!

When can I buy and sell penny shares?

The London Stock Exchange is open for trading in UK shares from 8am to 4:30pm, Monday to Friday.

Take care if you place an order outside these hours it will not be carried out until the market reopens at 8am on the next working day. To avoid being caught out by unexpected price movements overnight, always specify an upper price above which you will not buy. This is known as a limit buy price.

In Red Hot Penny Shares, I give readers specific buy, hold, sell and buy limit price information on all the shares I recommend. Click here to find out more about Red Hot Penny Shares and then claim your no-obligation 3 month trial.

How do I choose a stockbroker and set up an account?

You can choose between three different types of service from a broker. The cheapest option is where a broker just buys or sells shares, acting on your instructions. The more expensive options are where a broker also starts to give you investment advice, or completely handles your investments for you. These three categories are known as:

A. Execution-only brokers

With execution-only brokers, all you do is contact a broker and get them to either buy or sell the shares of your choice. The broker will not give any advice on the shares. They are simply there to execute your buy/sell instructions. Although even these brokers offer investment research and information like share price charts on their websites.

B. Advisory brokers

For a fee, you can talk to advisory brokers. They provide a service for those who would like to control a portfolio of shares but are not confident enough to go it alone. Most such brokers ask you to come in for an interview or complete some documents to find out what you are looking for, your income and commitments, and your attitude to risk. Advisers can offer two services. Either they will have details of all your investments and give advice on them as a whole, or they will give ad hoc advice on buying and selling the individual shares that you suggest.

C. Discretionary brokers

This is the most expensive of the three services and is typically used by very wealthy clients. The discretionary broker buys, sells, advises on and manages your share investments completely. They will be in close contact, keeping you informed as to the current value of your investments and what they are buying and selling, but will have full authority to act on your behalf. As with an advisory broker, you will have to undertake an initial interview to give your broker a clear idea of what they should be doing on your behalf.

Whichever broker you decide to use, you will be sent a client agreement letter'. This outlines the services you will be offered and the terms under which the broker will work for you. You will then have to deposit some money into your account then your broker is ready to start buying and selling shares for you.

Some accounts require a minimum initial deposit. In addition, you should ask about any costs that may not be prominently displayed on sales brochures, such as annual fees, monthly subscription charges and account inactivity fees.

What is the difference between holding share certificates myself, and having a nominee account?

In days gone by you always received a share certificate each time you bought a share. This created a huge amount of paperwork in the City and required shareholders to keep these certificates safely. To ease this administrative burden, most brokers now register your share purchase using a nominee company' that it owns and operates. The shares are officially owned by this nominee company. However the records of the nominee company will attribute these shares to you.

This saves you money because you do not have to pay for registration costs. It is also convenient because you don't have to worry about losing your share certificates.

However, there is a drawback. If you hold shares via a nominee account it does mean that you won't appear on the register of shareholders. This means that the company in which you are a shareholder cannot contact you directly and this may mean that you cannot attend shareholder meetings or receive the occasional product discounts or other minor perks that are offered to shareholders. Some brokers will arrange for you to get these benefits; so shop around if this is an important factor for you.

Which type of broker account is right for me?

If you are just beginning to invest in penny shares, we recommend you open a nominee account with a low-cost, execution-only broker.

With a nominee account you don't have to worry about share certificates, as all your shares are held by the broker's nominee company. And with an execution-only broker you are not paying for advice and therefore the cost of dealing is kept to a minimum. Bear in mind, though, that the cost per trade is only one of the factors that should influence your choice.

If you are going to trade online, check that the broker has backup services such as telephone and telephone touch-tone trading for when your internet connection is not working.

Some companies do charge higher dealing cost for investing over the phone though, so do watch out for that. Here at Red Hot Penny Shares, we work with a leading online broker to provide a dedicated share dealing and ISA platform called Red Hot Share Dealing (click here to find out how you can open an account in just a few simple steps). This service charges the same dealing costs whether you trade online or by telephone.

If you are at all unsure about investing, you should always seek independent financial advice. You must understand and be comfortable with the risks involved.

David Thornton is a small cap share expert with over 30 years’ experience in the investment world. He was an equity fund manager at Henderson Global Investors for 17 years, and in 2006 he launched the Matrix New Europe Fund, investing in equities throughout Eastern Europe, Russia and Turkey. 


Recently, David took over as editor of the UK’s best-selling small cap newsletter, Red Hot Penny Shares – where he can fully indulge his passion for hunting exciting small share companies across the country. He also writes our free Penny Sleuth email.