What To Know About Limit Orders and Penny Stocks

An important component of understanding trading, and in particular penny stocks, is knowing the difference between different types of orders. With regard to penny stocks, limit orders are one of the key order types to understand.

If you’re a follower of the Tim Sykes Challenge, which is the creation of penny stock trading guru Timothy Sykes, you may already know about limit orders and their importance.

He tells his trading students to always use limit orders rather than market orders to quantify risk.

So what should you know about limit orders?

Why Limit Orders Mitigate Risk

Investing in penny stocks is inherently risky, and that’s not something that’s debated. However, there are plenty of people who are very successful in this niche trading area, because they’re willing to take on a high level of risk for a high level of reward.

The most successful people also understand the importance of limit orders in terms of mitigating some of their risk.

With a limit order, you’re determining the maximum amount you will pay for a share of a stock. You might say you will pay only $0.30 for a share, and no more. Essentially, you’re willing to buy shares of that particular stock only if the price is $0.30 or below.

Limit Orders vs. Market Orders

To understand the relevance and advantages of limit orders, especially as it pertains to penny stocks, it’s important to compare them to market orders. These are the two primary types of orders traders often use. A market order signifies that you want to make a trade as quickly as possible at the current price of the shares.

You’re saying the price isn’t necessarily relevant to you when making your purchase, and you want a set number of shares of that stock regardless of the cost.

The Risk of Limit Orders

Limit orders may seem like a great thing, particularly if you’re trading penny stocks or higher risk securities, and they are, but there is a possible disadvantage.

A limit order may not actually be executed. If the market price of a security never falls within your limit order parameters, you may not have your order completed. There’s also the possibility that while the target price could be reached, there may not be enough liquidity to fill the order.

Market Hours

Another thing to note about limit orders is the fact that they may be placed before or after trading hours, which for the U.S. stock exchanges are 9:30 a.m. and 4 p.m. EST. Limit orders are placed in a line for processing, and that’s done once trading resumes again.

This can be advantageous for penny stock traders, however, it should also be noted that unless you choose the right trading platform, limit orders can become expensive because of high brokerage fees.

Limit orders are one of the fundamental things a successful penny stock trader needs to have an in-depth understanding of because they’re something you’ll often find yourself using.

Author:.

Carmelo is a marketing writer and blogger helping small and medium size businesses craft winning content strategies. She's always scouting the web for new social media strategies and is slightly addicted to apps. When not tapping the keyboard, you are likely to find her in the park playing with her uncontrollably friendly Irish setter or trying out new vegan recipes.

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