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.
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. This means your terms, not the market makers’ terms, will be used when you buy or sell penny stocks.
2. Keep within regular trading hours.
An absence of volume can lead to after-hour trades that are illogical and most definitely do not represent a good match of buyer and seller. Even a few pennies can make a tremendous difference when it comes to penny stocks. Sticking to regular trading hours allows you to elicit the most efficient trade.
3. Avoid chasing performance.
For some reason, investors sometimes decide to buy only once a stock has moved higher. When a stock flies, these investors believe the environment is safe for them. They may be 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. Maintain your holdings at 20-30 positions.
This is a golden tip. 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 get too few stocks, you get the risk of huge 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 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 happen, take the next opportunity. Because of the volatility, a stock may have yo going back and forth sometimes. There’s going to be no rapid-fire day trading, but go ahead and sell a stock if you think it will be dropping in value and vice versa.