Six Basics of Penny Stock Trading

Penny stocks, also referred to in some countries as cent stocks, are common shares of small companies trading at low prices a share. There is barely a shortage of these companies, but if you want to be successful, have a penny stock investing plan that starts with observing the most essential penny stock-trading rules.

1. Use limit orders every time.

Because of their nature, penny stocks very thinly traded. Therefore, the bid and ask deviation can be quite big. Investors who use market orders could be played by market makers who just want to make a quick buck. Using limit orders is the best way to avoid this scenario. That means, when you buy or sell penny stocks, your terms – not the market makers’ – will be followed.

2. Trade inside regular trading time.

In an absence of volume, the outcome could be after-hour trades that hardly make sense and never represent a good buyer-and-seller match. With penny stocks, even a few pennies can make so much difference. For the most efficient trade, keep within regular trading time.

3. Avoid chasing performance.

For some reason, investors can decide to buy only if a stock goes higher. When a stock flies, these investors believe the environment is safe for them. But this is far from the truth. In most cases, by the time they decide it’s safe, the opportunity is no longer there and losses have replaced them. What’s safe is when you keep to new recommendations and the buy limits that accompany them.

4. Keep your holdings to 20 to 30 positions.

This is a golden tip. Maximum gains could be achieved with 20-30 positions. Returns will be diluted if you get more than that. Lower than that and you get a significantly lagging performance. Worse, if you get too few stocks, you get the risk of huge losses.

5. Trade with a reason.

Owning a stock that already has shot up in value is acceptable, as long as you have good reason to do so. “These reasons can be aptly called “triggers. If a stock has no trigger, it will never take off.

6. Expect a three-month average holding period.

Lastly, keep in mind that penny stocks are extremely volatile creatures that can rise and fall any minute. Big gains can be expected up to within 90 days. If that move does not take place, check out your next opportunity. Sometimes, you’ll have to go back and forth with a single stock due to its volatile nature. Don’t expect rapid-fire day trading, but if you believe a stock’s value is going down and vice-versa, don’t think twice about selling it.

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