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 are many such companies today, but for you to be successful, have a penny stock investing plan that begins with following the most basic rules for every penny stock trader to keep in mind.
1. Keep to limit orders.
Penny stocks are very thinly traded due to their very nature. Therefore, the bid and ask deviation can be quite big. When investors use market orders, they can be tricked by market makers who want to make some fast money. 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.
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. Even a few pennies can make a tremendous difference when it comes to penny stocks. By trading within regular hours, you can ensure an efficient trade.
3. Do not chase 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. They’re wrong. Typically, by the time they decide its safe, the opportunity has passed them by, and then losses come in. What’s safe is when you keep to new recommendations and the buy limits that accompany them.
4. Limit your holdings to 20-30 positions.
This is a rule of thumb. You can achieve maximum gains with a portfolio that consists of 20-30 positions. More than these numbers will only result to a dilution of returns. Lower than that and you get a significantly lagging performance. Worse, if you buy too few stocks, you will likely lose big.
5. Have a reason for trading.
Provided you have good reason for doing so, there is nothing wrong with owning a stock that has climbed up in value. “You can call these reasons “triggers. There’s no taking off for a stock without a trigger.
6. Expect a three-month average holding period.
Lastly, penny stocks can be very volatile, going up or down quite fast. Expect big gains up to a maximum of 90 days. If that move does not take place, check out your next opportunity. 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.