| Chapter 4: Penny Stock
Bidding Success
Being new to penny stocks does not mean that you shouldn’t have all of
the necessary information to make the right decisions from the
beginning. We will not lie to you. Penny stock investing can be a risky
adventure but having a good foundation of knowledge will help you
throughout the entire process of investing.
With that said, one of the first things that you will want to do is to
work on understanding penny stock bidding and prices. It is not as
simply as you think, actually.
Penny stocks are a bit different in that they do not have just one price
that they can be bought at or sold with. There are various prices that
they are bought and sold with. You really need to be able to understand
each difference here.
Bid versus Asking
The first thing to know is the difference between what is called the
bidding price and the asking price.
• In the bid price, the rate is what someone out there is willing to pay
for the security or stock. This is also the number at which you could
sell your stock if you decided to.
• The asking price, on the other hand, is the amount at which you are
willing to sell your security for. In other words, this is the amount at
which others would have to pay to get your stock.
Understanding the difference here is important. If you are looking to
purchase a stock, you will need to provide an accurate bid for it. If
you are looking to sell your stock, you need to know what you could get
for it.
The Spread
The next key price then, to understand is the spread. The spread of this
situation is the difference between the asking price and the bid price
on the stock sale. In many cases, this number is a “built in loss” when
you are investing in the stock.
What is this built in loss? It is the fact that you have to take into
account the cost of your trade as well as other factors. This would
include such things as the transaction fee as well as the fee that your
broker will charge you.
If you have a stock that you are looking to sell, you will want to at
least break even when you sell that stock, right? But, to do this, there
are certain things that you will need to take into consideration. To
break even, you will need to insure that all of these extra costs are
figured into the price that you sell for.
One thing that you will need to take into account is the fact that
you’ll need to know just how much you will need to ask to get the right
coverage to break even or do better in the sale of a stock. It can be
that the spread can be as much as fifty percent to one hundred percent.
In some cases, it will be over that as well. More commonly, though, it
is likely to be between twenty five and thirty five percent.
Nevertheless, this is a cost to take into consideration.
Beware of any stock broker or other sales person that promises you that
you will get the same price that you paid. They are not telling you the
entire truth as far as price goes.
Two Prices?
Are you confused by the two prices that are listed? Penny stocks are
commonly bid on using two price figures. There are generally two bid
prices listed and two ask prices listed. This is called the inside, as
well as the outside, bid and ask.
This is the range in which the stock can be bought or sold. In most
cases, you will want to consider the outside bid and ask prices as well
as the lower bid and the higher ask prices. These are the numbers you
are looking for as they are generally the costs that you will find a
public customer or beginner investor is likely to need.
Mark Up Pricing
There are several things to think about when it comes to penny stock
investing. In the sale of penny stocks, there is an additional cost to
take note of. That is the mark up price. Some broker or dealers will
mark up the price of the security to a certain degree. They do this
because they have had to maintain an inventory of the product. This
usually happens when they need to maintain inventory sufficient to the
supply demand that is out there fore orderly and liquid markets.
In other words, to you, this is likely to be an additional cost of the
penny stock. This is again the built in cost factor. This cost should be
taken into consideration when it comes to your investing strategy as
well as what your long term goals are.
Getting A Good Price
So, with all of that said, how are you likely to get a good price for
the penny stocks that you will be investing? There are many ways that
you can look at this. The most important thing to consider is the entire
package. For example, in a typical situation, you are likely to get the
best transaction in an agent situation.
That is due to the fact that the agent is looking out for you in a
better manner than that of a principal situation. In many ways, the
agent will be able to get the best possible results for your needs based
on what the pricing factors are.
In most cases, penny stocks are purchased with a broker dealer type of
situation. In this case, the broker will buy from the broker’s customers
at the bid price. They will sell at the ask price. That means that they
get their compensation, whatever that is as determined beforehand. In
addition to this, they are likely to get any fees associated with the
mark up as well. |