Trading penny stocks can be a tricky job. Before you begin trading micro-caps– especially stocks that do not trade on a major exchange– you need to learn how to get the shares you want at a price you’re willing to pay.

Buying a stock on the NYSE is relatively easy. Nine times out of 10, you can put in a market order that will be immediately filled right at the price you want. But bulletin board issues and some of the thinner micro-caps on the NASDAQ and Amex can be a completely different animal.

When I find a penny stock that fits my buying criteria, I first look to see how it trades. If I feel the stock has enough regular trading volume, I know I should have no problem picking up shares on the open market at a favorable price. But if the stock is thinly traded, I never try to buy shares without using a limit order.

It all comes down to volume. More buyers and more market makers facilitate frequent trading, with a much smaller gap between how much a buyer is willing to pay–and how much a seller is willing to take for his shares. The smallest stocks on the market rely on fewer market makers, and can sometimes go hours or even days, without a single trade. That’s why it’s so important to be careful and trade smart.

Here are three quick tips to help you buy penny stocks at the price you want to pay…

1. Always check the bid and the ask. Every major online brokerage I’ve checked out has tons of extra features you probably won’t find on the free financial websites out there. One of the most useful tools for the microcap trader is the real-time quote window. Pull it up and you can easily see the bid and the ask. This will give you a clear picture of how much you should pay for a stock before you buy. Remember, the current price of the stock is not necessarily the price you will need to pay to pick up shares. This number is simply the price at which the last transaction occurred.
2. Unless you’re planning to make a quick trade, be patient! Simply put, you can sometimes get a better price by waiting. If there’s an unusual amount of buying in the early morning, it will usually calm down after the first half hour of trading. This “rule” isn’t carved in stone, but it is a helpful tip that could help you save a little money on your next trade.
3. If you’re making a longer-term investment, build a position over time. You’re not looking to trade, so what’s the rush? Build your positions over days or weeks, instead of putting in a huge order. You’ll have a better chance of getting smaller orders filled right away.

Follow these tips every time you buy penny stocks, and you’ll have the opportunity to make more money. After all, isn’t that what it’s all about?

Sincerely,
Greg Guenthner

February 19, 2010

Greg Guenthner

Greg Guenthner heads up Agora Financial’s small-cap division and is the founder of one of the only independent OTC research advisories in the industry. A graduate of George Mason University, Guenthner joined Agora in 2005 after several years as a journalist. He is managing editor of Penny Stock Fortunes and Bulletin Board Elite.

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