When You Buy Penny Stocks, NEVER Use a Market Order

I had big ambitions when I first started this blog about trading penny stocks. I thought for sure that I would be able to name a topic that was related to trading, write an excellently written post about that particular topic, and stay on the subject throughout the whole post. I have since found that I simply don’t write like that. I ramble a lot, and I write “all over the place”, and I really don’t feel like developing a more formal structure to my writing style, because I wanted this blog to come from more of a personal experience side than a documentary or a “simply stating the facts” perspective. In doing this, I have realized that I really just want an outlet to talk about all the different things I have learned, and how they have helped me in my understanding of how to trade penny stocks…hopefully someone out there will either learn from this information, or simply get a kick out of how randomly written it is.

With that being said, I wanted to do a quick post about the difference between a market and a limit order in stock trading. A market order is basically an order that you place to buy or sell a stock that gets you into the market at the supposedly current prevailing market price. With a market order, you really don’t have any control over what actual price you will be “filled” at. You may see the current price of a stock trading at $0.55 a share, so you decide to buy a couple hundred thousand shares, but then you end up getting filled at $0.61 or whatever, due to a wide intra-day trading range. You really have no control over how or when you’ll get filled (this actually holds true for ALL types of stock trading orders), but with a market order, the idea is that you’ll get filled quicker because you’re not being “picky” about price. This has a very slight benefit – you may indeed get filled quicker, but there can be a HUGE drawback in terms of losing quite a bit of leverage due to being filled at a crappy price.

If you gauge the potential of a price move for a stock, and determine that it will probably rise 40% to 50% above its current price, it can be detrimental if you lose that potential for percentage gain through getting filled at a price far above what you expected to get when you entered the market. For example, let’s say that I’m looking at a stock that’s trading at $0.10 a share (for ease of math). I want to get in at this price, because if the stock goes to $0.15 a share, that’s literally a 50% return on my money right off the bat. So, I place a market order to hopefully get filled at $0.10 a share. As it turns out, I did get filled, but at $0.13 instead, due to a fast market or volatile fluctuations in price on that trading day. Now, if the stock is expected to only hit $0.15 before going back down or “stalling out”, I have only gained about a 15% return on my money at $0.15. I would rather have 50% than 15% any day of the week. So how do you ensure that this doesn’t happen? The answer: Place a LIMIT order.

Limit orders mean that you specify the price you want to enter (or exit, if selling) the market. You will be filled at the price you specify, or better. Meaning, if you placed a limit order to enter at $0.10, you will either get filled at $0.10 or even better, like $0.08 or $0.09. It’s kind of rare for you to get better than the price you specify, but it can (and sometimes does) happen. The only drawback to placing limit orders is that if the market doesn’t hit your price, and normally “trade through” your price—meaning, go lower if buying or higher if selling, you may not get filled at all. Hey, that’s the chance you take. This is where patience comes into play. Trust me when I say, you won’t lose out if you place a limit order and don’t get filled…it will usually trade lower in a few days than the price you were trying to buy at, or higher in subsequent days than the price you were trying to sell for. I use limit orders EXCLUSIVELY, and I haven’t had any problems whatsoever with generating profits from my penny stock trades. True, not all of them are winners, but the ones that are can have an insane rate of return.

In summary, if you use market orders, you’re basically giving a market maker the right to party at your expense. They’ll snap up your order and then turn right around and resell it the same day to someone else, and scalp the profit that YOU could have made if you would have been patient. Before I understood this, I would place market orders, and no lie, my price would be the day’s high if I was buying, and the day’s low if I was selling. That’s having “SUCKER” written across your forehead. Make sure that when you buy penny stocks, use limit orders only.

Well, that’s all for today…so long until we blog again…