Six Cardinal Rules of Penny Stock Trading
Penny stocks, also termed cent stocks in some parts of the world, are common shares of small companies trading with low per-share prices. There is hardly a shortage of such companies, but to be successful, you need to create a penny stock investing plan, and that includes following the most basic rules every penny stock trader should observe.
1. Use limit orders at all times.
Penny stocks are very thinly traded due to their very nature. Therefore, the bid and ask deviation can be quite big. Investors using market orders may be at the mercy of market makers seeking a quick buck. By using limit orders, the market maker can be stopped from from buying or selling at any price. That means you will be buying or selling penny stocks on your terms, instead of the market makers’.
2. Trade inside regular trading time.
When there is an absence of volume, the result could be after-hour trades that are nonsensical and most surely do not represent an efficient buyer and seller match. With penny stocks, even a few pennies can make so much difference. By trading within regular hours, you can ensure an efficient trade.
3. Avoid chasing performance.
For some reason, investors can decide to buy only if a stock goes higher. As a stock soars, these folks believe that it’s safe for them to make a move. They’re wrong. Usually, by the time they think they’re safe, the opportunity has left and the losses arrive. Sticking to new recommendations and the buy limits they come with, is safe.
4. Limit your holdings to 20-30 positions.
This is a rule of thumb. Maximum gains could be achieved with 20-30 positions. More than that and you get a dilution of returns. Lower than that means a performance that lags significantly. Worse, buying too few stocks means you’re at risk for large losses.
5. Have a reason for trading.
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. A trigger is necessary for a stock to take off.
6. Expect a holding period of 90 days at average.
Lastly, keep in mind that penny stocks are extremely volatile creatures that can rise and fall any minute. Expect big gains up to a maximum of 90 days. If that does not take place, get on with the next opportunity in line. There are times when you may have to go back and forth on a certain stock due to the volatility. You won’t see any rapid-fire day trading, but if you foresee a stock’s value going down and vice-versa, the best thing to do is to sell it.