Penny stocks, also referred to in some countries as cent stocks, are common shares of small companies trading at low prices a share. 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. Use limit orders at all times.
As explained by their nature, penny stocks are very thinly traded. Hence, the difference between the bid and the ask can be huge. Investors who use market orders could be played by market makers who just want to make a quick buck. By using limit orders, the market maker can be stopped from from buying or selling at any price. That means, when you buy or sell penny stocks, your terms – not the market makers’ – will be followed.
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. With penny stocks, even a few pennies can make so much difference. By trading within regular hours, you can ensure an efficient trade.
3. Never chase Performance.
For whatever reason, there are investors who only buy after a stock moves up. When a stock flies, these investors believe the environment is safe for them. They’re wrong. 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 rule of thumb. If you want to get maximum gains, maintain a 20 to 30-position portfolio. More than that and you get 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. Trade with a reason.
It’s fine to own a stock that already has already moved up in value provided you have a good reason for doing so. These reasons can be referred to as “triggers. If a stock has no trigger, it will never take off.
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 move does not happen, take the next opportunity. Because of the volatility, a stock may have yo going back and forth sometimes. 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.