You need to understand the difference between a market order and a limit order. With penny stocks always use limit orders when buying or selling shares. I will explain why you should use limit orders with penny stocks, what can happen when you don’t, and even the one biggest downside to them. If you want to profit from trading penny stocks or any kind of shares for that matter, then you need to know what I am about to explain.
First I think you guys are amazing, and you will get this stuff and be making money from trading penny stocks no problem. Now, the type of order you want to use when you buy and sell shares, then you are getting the default or standard, market order. This simply means that you are buying or selling at the market price, so you get whatever the shares are at when you enter your trade.
With a standard market order, you are simply telling your broker to buy, and you will find out later how much you wound up paying. This is how most new investor’s trade, by using market orders. But starting right now, from this moment, you should only use limit orders, in my opinion. I will get into limit orders, and how they will be far superior when trading penny stocks, but first it will help to explain how Market Orders might already be costing you. With thinly-traded penny stocks, the act of your buy or sell market order can push the prices around, and that volatility can cost you.
Consider this example – you go to buy $2,000 of a 10 cent penny stock. However, there is only $300 worth being sold at 10 cents, then another $250 at 12 cents, then another $4,000 being sold at 15 cents. Your $2,000 purchase will get you some shares at 10 cents, a few more at 12 cents, then the majority of them at 15 cents. The worst part is that once your order is filled, meaning you got $2,000 worth of the penny stock, you are buying demand ends. Quite often the shares drop back down to 10 cents, right where they were in the first place. You just paid close to 15 cents for a 10 cent penny stock, and are already down 33% just because of your individual purchase.
There’s got to be a better way. What you can do is use a limit order. For example, you tell your broker, “I’ll buy the stock at 12 cents or less. In our scenario, you are buying might push the share price to that level, but it stops there. You will only get shares for the limit price you specified, or lower. In our example, that means you get some for10 cents and more at 12 cents, but none for any prices higher than your 12 cent limit. You never end up paying a higher price than the limit you specified.
The downside of a limit order is that you may not get all the shares you wanted. Again, in our example, you would have only bought a total of $450 worth of the penny stock, and pushed the price up to 12 cents, but at least you will not have paid more than you wanted. You then have the choice of raising your limit price, which typically will help you get more shares, or just come back another day to try to get the rest at a price you feel is appropriate. Keep in mind, for every individual day which you end up buying or selling some shares, you will pay another brokerage commission. If you buy shares of one stock on three different days, that’s 3 commission charges.