If you’re hoping to break into stock trading and are interested in penny stocks in particular, one of the most important things you must do is understand the different types of accounts and orders you can use. Understanding your options can help you create a trading strategy suited to your needs and help you make wise transactions since you’ll more clearly understand all of your available choices.
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As a beginner, you can start by researching these four types of stock trading accounts and orders and learn what they’re for and how you can use them to your benefit.
Image via Flickr by Katherine Ridgley
The first type of trade you’ll place will likely be a market order. This is the most straightforward type of trade where you simply tell a broker how many shares of which stock you want to buy. When it comes to learning how to invest in penny stocks, you need to be aware that there may be a change in market prices from the time it takes to place an order and the time an order is executed. The fluctuation may not be much, but an increase or increase of even a few cents can make a difference when you’re trading penny stocks.
A more advanced trading technique is to place limit orders rather than market orders. This prevents any issues you might have in buying or selling above or below a certain stock price. Basically, you place an order that will be automatically triggered once the price per share reaches whatever amount you select.
The drawback is that the stock price may never reach the amount you’ve set. For example, you can place a limit order to sell 100 shares once they’re worth $5 each. If the stocks are never worth that much, the trade won’t be executed.
Another issue is that the shares may rise or fall beyond the value of the limit order. For instance, the 100 shares you wanted to sell may rapidly increase in value and be worth $10 each. If you’d placed a limit order to sell when they reached $5, that’s the trade that would be executed. You may also set up a limit order to buy shares once they reach a certain value but you’ll lose money if their worth continues to drop after the trade has gone through.
Cash vs. Margin Accounts
You have several account options when setting up to place market orders, limit orders, and other orders. Two of the most popular choices are cash and margin accounts.
Both require depositing an initial amount. With a cash account, you must have the full amount needed in your account before you can make a transaction. With a margin account, you make transactions by borrowing money with cash or securities. You then pay an interest rate on the margin loans used to execute a trade.
One of the most important things you can do as a new investor is to know your options. Even if you’re just starting out with a few affordable penny stocks, you can take advantage of a variety of account types and options to help you make the wisest trades possible.