Market Orders, Limit Orders and Stop Loss Orders For Trading Penny Stocks

There are many different kinds of orders which you can use to trade securities such as stocks. There many more complicated orders types in addition to these basic ones but most orders are derived from these four below.

Market Orders – This type of order will execute your trade to buy or sell immediately at the current market price but since the market price can and will fluctuate a great deal, you won’t necessarily receive the price that you expect. A market order looks for the current best bid (buyer) or ask (seller) and then tries to execute the order immediately. If the stock is has a low trading volume and you enter a market order you may receive a price way different than you thought you would. This is especially true in penny stocks in the OTCBB and Pink sheet markets because the market makers have a 30 second to 1 minute grace period to execute your trade and will purposely hold your order to steal some of your money.

If you trade high liquid stocks such as MSFT, then you have nothing to worry about when using a market order since the bid / ask spread is always very small, and the stock trades extremely high volume. If you try to trade a stock with spreads larger than .02-.03 and your position is more than 100 shares, or the stock is trading low volume, you should rarely use a market order unless in the event of an emergency.

Limit Orders – This type of order will only execute your trade to buy or sell at a specific price that you specify. The order will not execute at any other price. The advantage to a limit order is that you will never lose out due to a large bid-ask spread or market maker manipulation. he disadvantage to this type of order is that if the stock does not actually print any trades at the price you specified and instead jumps over your price, your order will not be executed.

This can mean you will miss out on a trade or may have a difficult time exiting your trade, especially in lower volume stocks with large spreads. In general, it’s best to use limit orders at all times except if you place an order to buy or sell a very high volume and liquid stocks which trade millions of shares a day. If you trade penny stocks you should always use limit orders.

Stop Orders –
A stop-loss order or a stop market order is an order you place to buy or sell to limit your loss. This type of order lets you choose a specific price and once this price level is reached an order will be executed to buy or sell at the current price. Since this is a market order you should only place this type of stop loss on high volume stocks with a small bid-ask spread. Never use these orders on penny stocks or stocks which have a large spread or trade low volume (I consider low volume to be a stock that is trading < than 500,000 – 1,000,000 shares a day). Stop-loss orders are very important because they essentially help to limit how much you can lose.

Stop Limit Orders – A stop-limit order is the same as a stop-loss order however you first specify a stop price and once this price is reached your broker will place a limit order at the same or a different price you specify. The problem with stop-limit orders is that at times stocks can move very quickly and sometimes will jump right past your limit price. If you are away from the computer when this occurs you could potentially lose a lot of money. For this reason, it is best to use stop limit orders only in very high volume stocks with a small spread or else only use them when you are currently present at your computer and will be able to cancel the order and enter a market order if a stock blows past your stop limit price.

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