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 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 at all times.
Because of their nature, penny stocks very thinly traded. Thus, the deviation between the bid and the ask is often substantial. When investors use market orders, they can be tricked by market makers who want to make some fast money. Using limit orders is the best way to avoid this scenario. That means, when you buy or sell penny stocks, your terms – not the market makers’ – will be followed.
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. With penny stocks, you can make or break a trade with even a few pennies’ difference. By trading within regular hours, you can ensure an efficient trade.
3. Never chase 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. They’re wrong. In most cases, by the time they decide it’s safe, the opportunity is no longer there and losses have replaced them. 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. If you want to get maximum gains, maintain a 20 to 30-position portfolio. More than these numbers will only result to a dilution of returns. Lower than that means a performance that lags significantly. Worse, if you buy too few stocks, you will likely lose big.
5. Trade for 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. ” There’s no taking off for a stock without a trigger.
6. Expect a three-month average holding period.
Lastly, keep in mind that penny stocks are extremely volatile creatures that can rise and fall any minute. Big gains can be expected up to within 90 days. If that move does not happen, take the next opportunity. There are times when you may have to go back and forth on a certain stock due to the volatility. 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.