It’s easy to make a few dollars with stocks like Microsoft and Google, but to hit a real home run, day traders should consider turning to penny stocks. There are plenty of companies at less than three dollars per share, but to take advantage of those opportunities, a trader needs a plan. Here are several penny stock investment rules to follow.
Use a Limit Order on Every Trade
By nature, penny stocks are thinly traded. Therefore, the gap between bid and ask can be significant. Investors using market orders can be easily manipulated by those looking to dump stocks and make fast cash. When a day trader uses a limit order, it allows them to trade penny stocks on their own terms.
Don’t Follow Performance
One of the biggest mistakes day traders make is to chase performance. For unknown reasons, many investors only buy stocks after they move higher. However, waiting that long can result in lost opportunities and other costs. Avoid this rookie mistake by sticking to newly recommended stocks and their buy limits.
Trade With a Purpose
This may be a restatement of the obvious, but it’s shocking how many investors buy stocks simply because they’re on the way up. A day trader should understand exactly what they’re buying and why they’re buying it. It’s perfectly OK to own stocks that have gone up in value as long as there’s a legitimate reason for the increase.
Expect at Least a 90-Day Holding Period
Penny stocks are very volatile; they can rise and fall with equal speed. In most instances, major gains come in less than 90 days. If that doesn’t happen, simply move onto another opportunity. While penny stocks sometimes call for more measured day trading, it’s acceptable to sell one if the investor believes its value will decline.
While there are multiple ways to get into day trading, penny stocks are one of the best options for an investor on a limited budget. Returns may not be as high as with more expensive stocks, but losses are more measured as well. Investors can visit this page for more day trading advice and strategies.