OTCPicks Penny Stock Blog

Any time you are dealing with assets that see as much movement as penny stocks, it is important to use all possible market order types at your disposal to minimize risk. Unless a trader plans on being in front of their computer or on the phone with their broker all day, it is almost impossible to keep track of the rapid pace of penny stock changes. Even the most experienced and knowledgeable investors cannot say for sure which direction a stock will move in, so various order types are used to take advantage of and protect against unexpected turns in the market.

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Limit Orders

This type of order has the broker enter or exit a position at a price you specify. The deal will only happen if that price can be attained. Limit orders let you know in advance the exact number you will buy or sell at, but brokers often charge higher fees than a standard trade so that can affect your bottom line.

Market Orders

These are the standard order that buys or sells the stock right then and there, at whatever the current price is. It is not guaranteed that you will get the price you just saw online or on television, but typically it will be close to that. These orders also typically carry the least amount of fees and transaction costs.

Stop Loss Orders

Designed to protect traders from drastic plunges, stop losses set a point below the current price that, if hit, will trigger an order to sell the position. If the stock increases, the stop loss does not come into play and you maintain your position.

Trailing Stop Orders

Similar to a stop loss, but sets the trigger in terms of percentage rather than a price point. This means these orders can be used to protect gains, because if the stock has a great upswing and subsequently falls by the percentage set in the order, a sale will be triggered and the gain will be realized.

Short Sell Order

These are bets that a stock will go down in price. With short orders, the trader is actually selling the stock and agreeing to buy the shares at a later date. If the price does in fact go down, the gain is the difference between the initial sale and the price when the trader buys back the shares to cover the trade. With penny stocks it can be difficult to short because the broker often lacks enough shares to lend traders in order to make the initial short sale. Many brokers also restrict short selling to stocks above a certain price, which can eliminate penny stocks.

When putting together a trading strategy, it is often the case that you must plan around the tools you can use. Stock market order types are a large part of your tools and when used correctly, can enable traders to let their winners run and cut losers short. It is important to know all restrictions and availabilities of your particular broker or platform in order to know exactly what can and cannot be done in any situation that arises.