By the definition from the SEC, any stocks with shares that trade for less than $5 are considered to be penny stocks. If you are trader interested in investing in penny stocks, you can simply apply most of the methodology of the stock market in general, while make a few modifications due to the perceived risker nature of the penny stocks.
1. Diversify your investments.
One of the most important rules on investing in penny stocks is don’t ever put all the eggs into one basket. As suggested by AffordableStock.com, you should break up your trading cash into five different companies with equal share for each one of them. No matter you are dealing with which form of investing, it is critical to diversify your investments properly. Thin trading volume may send a stock to the moon, while it may also sent it to the floor as well. The probability of all five choices crashing at the same time is very low, and you also preserve you capital so you are will live and trade another day.
2. Limit your orders.
A market order occurs when it gets filled with whatever price the penny stock is trading at certain time, which can be a very dangerous scenario, no matter whether you are buying or selling. Therefore, you should always use a limit order and this allows you to decide the price you would like to pay or sell. Once the market is moving too rapidly, the order does not be filled, which is better than a bad fill at an undesired price. You will have another opportunity to buy or sell at the best price on another day, unless you are unfortunate to be holding a dog stock.
3. Snake bit by a penny stock.
Please keep in mind that investments in penny stocks is much more speculative than the higher-priced stocks. First of all, the low price of a penny stock generally indicates that the company is fairly new, small or less properly managed. Most penny stocks trade in much smaller volume than other stocks, and the thin volume may result in quick and relatively large fluctuation of prices. It takes just little volume to make a penny stock hurtling down or shooting up. Thus, at the level of penny stocks, a dollar move can be huge, especially when you are holding thousands of shares. Keep in mind that what penny stock gives could be taken away easily, and this should be included when you formulate your trading strategy.
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