5 Takeaways That I Learned About Finance

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Six Key Rules of Trading Penny Stocks

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 every time.

Penny stocks are very thinly traded due to their very nature. 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. 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. Avoid chasing performance.

For some reason, investors sometimes decide to buy only once a stock has moved higher. When a stock soars, these people think that the waters are safe for them. But this is far from the truth. In most cases, by the time they decide it’s safe, the opportunity is no longer there and losses have replaced them. 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. Less than that and performance lags considerably. Worse, if you get too few stocks, you get the risk of huge losses.

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. These reasons can be referred to as “triggers. If a stock has no trigger, it will never take off.

6. Expect a three-month average holding period.

Finally, take note that penny stocks can be highly volatile, rising up and crashing down very fast. Big gains can be expected up to within 90 days. If that move does not take place, check out your next opportunity. 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.

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