Buying Penny Stocks

A detailed look into penny stock order entry, modification, and tips.

Buying Penny Stocks - Buy Orders

To buy a penny stock, you need to know some basic details before you can enter a buy order with your penny stock broker. You also need to make sure you have enough money available for use, or "buying power" to cover the cost of your order, including the commission. After verifying how much buying power you have, you need the following information:

1. The ticker symbol of the stock (e.g.- AAPL is the stock symbol for Apple)

2. The quantity of shares you want to/are able to acquire. This is the reason you need to know how much buying power you have, so you can calculate, or estimate in your head the number of shares you can afford. If buying power isn't an issue you still need to determine how much money you want to put in the stock, and calculate the number of shares based on that. Simply divide the money you have, or want to put in, by your order price.

3. Your order price is the price you are willing to pay for each share.

4. The order type you wish to use. A 'market order' means you are willing to pay the best available price at the time that will fill the order. A 'limit order' lets you specify the maximum price you are willing to pay. Your order will be filled with shares at the best price available, up until the price hits the 'limit'. Sometimes you will get a full order below or at your limit, but other times there simply won't be enough shares available, and you'll either get a partial fill, or no fill at all. Only limit orders should be used for buying penny stocks. Market makers can and will use market orders to their advantage, and you might pay a very high premium for your shares.

5. The duration of your order. By default most brokers consider an order a 'Day' order, or one that will expire at the end of the trading day if it is not filled or is only partially filled. You can also select a 'GTC' or Good Til Cancelled order. This order will not expire at the end of the day, and will stay in effect until you cancel it. Most brokers let you specify and adjust a cancellation date for a GTC, and some will set one automatically for one or two months in the future.

Special Order Instructions:

AON - All Or None - These orders ensure that if and when you do get an order fill, you get all of the shares you requested in one batch. This guarantees you will not get a partial fill, a frustrating occurrence with penny stocks especially when a market maker only has 5,000 shares to sell you. AON's can be handy if you don't want to deal with partials, but it can severely limit your ability to get timely fills, or fills at all. These orders tend to be processed much slower than a standard limit order, and you might not get a fill at the best asking price or even the next best. TD Ameritrade states that "AON orders have the lowest priority in the market." They also tend to only match the order with a single market maker, so that MM needs to have the full amount of shares for you to have a shot at any.

Another thing to note with AON orders is that they will not show on the Level 2 quote. The market makers won't quote your order because it is conditional upon a seller having the full amount of shares, at once, for your orders to match. To avoid the confusion and frustration of - "Why won't my order fill! There's a MM right there!!" - they simply don't quote AON orders.

FOK - Fill Or Kill - This order instruction is not always available with all brokers, and is not typically used with penny stocks. It basically tells the market maker to either fill the order immediately, and if he can't, kill the order immediately.

Example Order Entry:

Most brokers will lay out a web form with boxes, drop downs, check-boxes, etc for you to enter all of the information talked about above. Simply put the information into the form and hit submit, or preview if your broker has a preview (should you wish to confirm your order information). Below is some example order data and a screenshot image of the order entry form for Zecco, and TD Ameritrade.

Type: Buy - Quantity: 100 - Symbol: AAPL- Order Type: Limit - Price: 330.00 - Duration: Day - Qualifier: AON

Selling Penny Stocks - Sell Orders

Selling penny stocks is just like buying them, only reversed. The only major difference when entering your sell order is to set the transaction, or action type to Sell. You also want to keep the following details in mind:

1. Make sure you put in the correct number of shares to sell. This number has to be at, or less than, the maximum number of shares in your account. Also, if you have any other open sell orders for that stock, you cannot factor in the shares from that order. If you have 100 shares of a stock, and have an open sell for 50 of them, the maximum you can put in to sell on a second order is the remaining 50. To sell all of them in the same order, either modify the existing order, or cancel it and start over with a new order. Some brokers, like Zecco, won't let you increase the share quantity of an order via a modification, even if you have the shares available. You must cancel the order and input a new one.

2. Setting a GTC order at your selling price target for a stock is a great idea, but make sure you know when the GTC will expire. Some brokers, like TD Ameritrade, will set a cancellation date a few months into the future, and may have a maximum duration for the order. Keep this in mind so your order doesn't expire without you knowing.

3. If you are in a very slow and/or illiquid stock and you want to get out, an AON order might be your best bet. Without knowing how many shares are on the bid, it is hard to know when and what price to put your sell in. If you use an AON order you can be sure that you'll get a full fill at or above the limit price you specify. This way you don't waste your time, and make the stock look weak by taking out small bids as you try to exit. Note well that AON orders usually take some time to process. Give it a good few minutes before changing the order. Also, if no single market maker has enough shares on their bid, you will be out of luck with the AON order. In this case you will likely need to use a regular limit order and set the limit price below the bid to get a full fill. Keep in mind that selling down the bid like this is not good for your fellow shareholders, and we do not endorse this type of selling if it can be avoided at all. Selling at the ask is a much better option for everyone... if you can.

Seeing where others are Buying and Selling

For each stock in the stock market, there are generally buyers and sellers of the stock at varying price levels. The buyers have their 'bids' in, and the sellers have an 'ask'. When you check a basic, Level 1 quote, you are seeing the best bid (highest), and best ask (lowest). When a bid meets an ask or vice-versa a trade will normally take place.

To get a clearer picture of where people are buying and selling you need to have Level 2 Quotes. Level 2 shows you more than just the best bid and best ask. It shows you every market maker participating, and each of their best bids and asks. On the left side are the bids in descending order from best to worst. On the right side are the asks in ascending order from best to worst. Using Level 2 you can see depth of the market, and get a better idea where support and resistance levels are. To learn more about Level 2 quotes check out our Market Information page.

Sample Level 2 Quote (with Time & Sales)

Unfilled Orders

If there aren't any shares available at or within your limit price when your order comes up to bat, you won't get filled. If you are desparetly tyring to get shares as quickly as possible, you'll need to modify your order price to a level with shares available. Otherwise, you simply leave your order and wait until a buyer or seller meets your price and your order is executed.

Partial Fills

Instead of getting no fill, you might also get what is called a partial fill. If you are trying to buy or sell 50,000 shares and there are only 20,000 shares on the bid or ask at your order price, then you are going to get a partial fill of 20,000 shares. This can be a frustrating event, but it is simply the way the market works. If you wish to enusre a complete fill, you can try using AON - All or None orders, which will only execute if they can do so with a complete fill. See above for more details about AON orders. Beware that sometimes a market maker on the bid or ask may only have 5,000 shares. 5,000 is the minimum quotable size for most penny stocks, and if the MM doesn't have a retail order, or shares of their own to buy or sell at their quoted price, they might only have 5,000 shares.

Commission Details

If you only get a partial fill and decide to modify your order price to fill the remaining shares, beware that you will be charged a second commission. You can cancel or modify any order before it is filled or partially filled without being charged at all, but as soon as one or more shares are filled the commission is charged, and any changes to the order are seen as a new order with a separate commission. Also, if it is a GTC order that partially fills on one day, the remaining order will still be open the next day and you will be charged a commission for each day in which the order is filled to any extent.

Modifying and Cancelling Existing Orders

Any buy or sell order can normally be cancelled or modified at any time. Each broker has its own user interface for doing so, some being better than others. Normally you can go to an 'order status' or 'open orders' page and click a link to cancel or modify and the website will give you take you from there. Remember as mentioned above, modifying or cancelling a partially filled order will still result in a commission, and if the modified portion of an order is filled to any extent you will be charged a second commission.