Penny stock investing is such a lucrative venture for many people.
This is because the price of penny stocks is comparatively lower that other stocks in the market.
A penny stock can cost from one cent up to about five dollars only.
They are traded on Pink Sheets, OTC Bulletin Board, on foreign exchange and other securities market.
In trading penny stocks, just like other commodities that you can buy/sell, there are also some rules that you need to adhere to and follow.
Using Limit Orders Due to their nature, they are only thinly traded.
Thus, the variation between bid and ask is great.
Market makers who want to make more money can manipulate those investors using market orders.
Using limit orders can help prevent the market maker from buying/selling at any price.
Therefore, one rule to follow in trading these low-priced stocks is to always trade on your own terms and not on the terms of the market maker.
Trading On Usual Hours This one goes alongside with the first rule on limit orders.
With the absence of volume, after-hour trades may result, which can be rather senseless.
Such trades are not apt representations of effective match between buyers and sellers.
The prices during these after-hour trades could be far above or far below the actual closing price in the stock market.
Penny stocks are too steep that any slight difference in the price can already result to a make or break trade.
If you want to draw out the most effective trade, always remember to trade only on regular times and hours.
No Chasing Of Trades The biggest possible mistake that a penny stock trader can make is when he/she chases trades.
There are some traders who decide to buy merely when the stock has gone up high.
If the stock takes on the opposite direction, these investors think that the market is already safe for them to participate in.
However, in many instances, great opportunities may have already been taken by other traders or have already passed by the time you have made up your mind to enter the market.
This automatically translates to losses.
The effect would even be blown out of proportion with those penny stocks that move rather quickly.
To prevent yourself from committing this error, always make sure to follow new recommendations and the limits coming along with them should be bought.
Keeping Holdings Down Holdings should be kept down from 20 to 30 positions only.
Such is the golden rule to follow in this type of stock trading.
Maximum gains are certain to be achieved with this portfolio.
If you create your portfolio way beyond this number, your returns would be reduced as a result.
Should you happen to build a portfolio that is less than this amount, the possible outcome is that your performance will significantly holdup.
The key is to always diversify if you want to succeed in such kind of stock trading.
Buying/Selling With A Purpose There should always be a reason why you need to trade; and not merely because you need to move.
You should understand exactly what it is that you buy and your actual reason for purchasing it.
It is also okay to possess a stock whose value has already increased; provided you have reasons for doing so.