All About Penny StocksUnderstanding Penny Stocks by Peter Leeds
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Buying Penny Stocks
Two Ways to Enter Your Trades: Computer or Telephone
So, you have decided that you want to buy some penny stocks of ABC. You need to know the following details for your order to proceed:
The ticker symbol of the penny stock.
(In this case, ABC). You may also need to know the name of the company, which is ABC Corporation for the purposes of our example.
The market which the penny stocks are trading on.
In our example, we will say that ABC trades on the AMEX.
The number of penny stocks you want to buy.
This is referred to as 'volume' of shares. We will say that you have $3,500 in available cash in your trading account, but only want to spend about $1,500 on this stock. The penny stocks' most recent trading price was around $0.50 per share.
Thus, you would probably want to order 3,000 shares (which would total $1,500 before commissions, assuming you bought at $0.50).
Market or Limit price?
Be sure to review my full description of the types of trade orders.
If you choose market, you do not know what price you will pay for shares, but you will be assured that the trade will go through.
Alternatively, you can set a limit price. I will say $0.60 for our example, meaning that you will pay $0.60 or less for each share.
If there is insufficient selling below that price you may wind up getting none or only a fraction of the shares you wanted. You feel that ABC has good daily trading volume, and since your order is small, and your limit price is a 20% premium to the last traded price, you feel confident that your order will be filled.
As well, when you got a recent quote on ABC you saw that there were 9.0 lots for sale at $0.50, which equals 9,000 shares currently being offered at $0.50.
In that scenario, your limit order to buy 3,000 shares at $0.60 would result in a purchase of 3,000 shares at $0.50.
Decide on the duration of your order.
Market orders do not require a duration, because since you are willing to take the best available price, your order will be instantly filled when it hits the trading floor.
Limit orders do require a duration, and you will get an additional brokerage commission every day that a part of that order gets filled. To buy 3,000 ABC over 3 days (assuming you only got 1,000 each day at your limit price) would triple your total commission cost. You decide that you want to guarantee to only pay one commission, so you make the order good for the day. This is called a 'day order.'
You can also choose to keep the order open for days or weeks at a time.
Know the total costs you would have to pay. Take into account commissions.
You are now ready to enter your order to buy some penny stocks. Let's say you decide to pick up 3,000 ABC shares on the AMEX at $0.60, good for the day.
With penny stocks, we highly recommend that if you have the option, you do your very first trade order on the phone with a live broker. Even though most brokerages will charge a slightly higher commission for this service, they will catch any errors you might have made, and can answer any questions. As well, some brokers will even be able to tell you if your order was filled (for market orders only) while you wait right there on the phone.
Tell them that it is your first order, and they will most likely be extra helpful.
Until your order expires (at the end of the duration you have set), or is filled (3,000 shares of ABC have been bought), your order is considered 'open.'
Monitor your open orders. You should be able to check these quite easily if you have an online brokerage account. Watch to see how many shares you have gotten and what price you paid.
If at the end of the trading day you have acquired 2,500 of 3,000 shares, and your order was good for two days, you may want to cancel the rest of the 500 that the order calls for. This will help you avoid paying a second commission, in case the other 500 get bought the next day.