The 6 Rules of Penny Stock Investing

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tdp2664 InvestorPlace Anyone can make a few bucks in stocks like Google or Microsoft, but to really hit home runs, you need to turn to penny stock investing and look for the unloved, the undiscovered and the misunderstood stocks. There is no shortage of companies priced under $3 per share, but to successfully take advantage of the abundance of opportunities, you need a penny stock investing plan. Here are six rules to follow when investing in penny stocks: Penny Stock Investing Rule #1 — Always Use Limit Orders By their nature, penny stocks are very thinly traded. As such, the deviation between the bid and the ask can be very large. Investors that use market orders can be manipulated by market makers looking to make a quick buck. The use of limit orders prevents the market maker from buying or selling at any price. In other words, buy or sell penny stocks on your terms, not the market makers’ terms. Penny Stock Investing Rule #2 — Trade During Regular Hours This rule goes hand-in-hand with limit orders. An absence of volume can result in after-hour trades that make little sense and most certainly do not represent an efficient match of buyer and seller. I’ve seen after-hours trades executed at prices well above or below the closing price in the market. With penny stocks, even a few pennies’ difference can make or break a trade. My advice is to stick to regular trading hours to elicit the most efficient trade. Penny Stock Investing Rule #3 — Don’t Chase Performance The biggest mistake I see investors make is to chase a trade. For whatever reason, some investors choose to buy only after a stock moves higher. When a stock takes off, these folks decide that the waters are safe to participate. Nothing could be further from the truth. In many cases, by the time you decide the water is safe, the opportunity is gone. Losses then follow. This effect can be magnified with penny stocks