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Six Basics of Penny Stock Trading

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 every time.

Because of their nature, penny stocks 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.

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. Do not chase performance.

For whatever reason, there are investors who only buy after a stock moves up. As a stock soars, these folks believe that it’s safe for them to make a move. They’re wrong. Usually, by the time they think they’re safe, the opportunity has left and the losses arrive. What’s actually safe is to stick to new recommendations and the accompanying buy limits.

4. Maintain your holdings at 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 that and you get a dilution of returns. Less than that and performance lags considerably. Worse, if you buy too few stocks, you will likely lose big.

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. “You can call these reasons “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. Large gains may be expected up to a 90-day maximum. If that does not take place, get on with the next opportunity in line. Because of the volatility, a stock may have yo going back and forth sometimes. You won’t see any rapid-fire day trading, but if you foresee a stock’s value going down and vice-versa, the best thing to do is to sell it.

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