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. Thus, the deviation between the bid and the ask is often substantial. Investors using market orders may be at the mercy of market makers seeking a quick buck. To keep the market maker from buying or selling at any price, limit orders must be used. That means, when you buy or sell penny stocks, your terms – not the market makers’ – will be followed.
2. Trade within regular hours.
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. 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. Avoid chasing performance.
For some reason, investors sometimes decide to buy only once a stock has moved higher. As a stock soars, these folks believe that it’s safe for them to make a move. But this is far from the truth. Usually, by the time they think they’re safe, the opportunity has left and the losses arrive. What’s safe is when you keep to new recommendations and the buy limits that accompany them.
4. Maintain your holdings at 20-30 positions.
This is a golden tip. If you want to get maximum gains, maintain a 20 to 30-position portfolio. Returns will be diluted if you get more than that. Lower than that means a performance that lags significantly. Worse, buying too few stocks means you’re at risk for large losses.
5. Trade for 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. There’s no taking off for a stock without a trigger.
6. Expect a holding period of 90 days at average.
Lastly, penny stocks can be very volatile, going up or down quite fast. Big gains can be expected up to within 90 days. If that does not take place, get on with the next opportunity in line. 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.