| From MrSwing.com Trading Penny Stocks Peter Leeds - Jan 7, 2006 Trading stocks is quite simple, and it is not any different whether you are dealing with penny stocks or other equities.
Trading Penny Stocks Simplified
Yes, you can go online to your broker and click 'buy these shares, sell those,' and you're done. You do not need to know all the concepts below, but I strongly suggest learning them so that next time you click 'buy these shares' and you wind up paying more than you expected, or you don't get all the shares you wanted, you will know exactly why.
In the simplest form, it is a breeze to buy or sell a stock.
The first thing you need is a broker. Simply put, they buy and sell for you based on your instructions, and take a small commission for their troubles.
Let's say you are interested in shares of ABC Corporation. Let's also assume that the ticker symbol (more about this later) is ABCD, the stock last traded at 45 cents, and you want to put about $500 into it. You think the price will go up over time, and decide you want to buy.
You go online to your brokerage account, enter that you want to buy 1,000 shares of ABCD, and click 'submit.' That's it! You've bought a stock.
Your brokerage account will reflect 1,000 shares of ABCD. If the price was still 45 cents when you bought, $450 will be taken from the cash in your broker account to cover the purchase, plus a few dollars for their commission (usually around $15).
Perhaps the price of ABCD is 75 cents a few months later. You decide to take your profits. Click click click. Online, you submit a trade through your broker to sell 1,000 shares of ABCD. $750 (less a small broker commission) gets put into your account. You have made a $300 profit on top of your original $450, and now you have $750 to invest in whatever stock you have your eye on.
It really is that simple.
Of course, learning the mechanics of trading is the easy part. Learning the art of trading is a bit more involved.
First, it is time to make a decision!
All the items I refer to (bid, ask, volume, etc...) are easily pulled up for any stock, through your broker or most free, online quote services.
In the most basic sense, a bunch of people trying to buy shares are matched up with a bunch of people trying to sell shares of the same company, and whenever a price is agreed upon, a trade takes place.
In other words, you are simply spending money to buy a stock, or selling a stock to get the money. Once you have a broker, you just give them your trade orders, and they worry about matching it up with other orders at the market.
In the following discussion we will use ABC Corp. as our stock. ABC is a fictional company just for the purposes of my explanation.
Starting from the Very, Very Beginning:
Stocks represent ownership in the underlying company.
If there are 1 million shares trading, 1 share usually is representative of 1 millionth of the company's value. The price of that share will change partially, but not entirely, based on the perceived value of the company (which changes over time).
As a company grows in size and brings in more money, the shares will generally increase in price. You may have owned 1 millionth of a company worth $1 million, but later you could own 1 millionth of a company worth $7 million. Your shares in that time may have increased 7 times over, or 3 times over, or 20 times over.
Of course, there are thousands of other factors that may alter the value of the stock, but I will not be delving into them at this point, so I can keep my explanation simple.
Stock exchanges provide a service where they match up buyers and sellers of securities. They pool all the people trying to sell a specific stock into one group, and pool all those trying to buy the same stock into another.
Exchanges operate on price priority. Of all the potential buyers, the one willing to pay (bid) the most is at the front of the line. Of all the sellers, the one willing to sell (ask) their shares for the lowest price is also at the front of the line.
How a Stock's Price Changes:
A Change in Fundamentals:
If a company suddenly comes out with some good news, people may be willing to pay more for shares. They will raise their bid prices. At the same time, however, the sellers may realize that their shares are worth more due to the company's recent announcement, and therefore raise their asking prices.
A Change in Technicals:
Supply and demand can effect share prices to a great degree. For example, investors buying shares may outnumber those selling at any given point, and the lack of supply and strong demand may combine to drive up prices.
Now that you have learned all this, just forget it! That's right. You do not need to know all the inner workings of the stock market or how a trade takes place in order to make money trading penny stocks. You do not need to know how an engine works to be able to drive a car.
What you do need to know about trading stocks starts right here:
Ask: The amount at which a shareholder is willing to sell shares of a company. Stock exchanges take the highest price being bid and the lowest price being asked. If these agree, or overlap (ie- best bid/buy price is $1.15, best ask/sell is $1.15) a trade will take place. In this example, shares will trade at $1.15.
Exchanges continually fulfill all the trades until the highest price someone is willing to pay (the bid) does not meet the lowest price at which someone is willing to sell (the ask). (For example, highest bid is $0.45 and the lowest ask is $0.55). At that point, no more trades will take place until someone raises their bid or lowers their ask. In other words, buyers and sellers are differing in their opinion of the value of the underlying shares, and until they agree nothing happens.
In the above scenario, consider the following examples of what might happen:
Some Market Order Examples:
If you are buying with a market order, you will get the least expensive shares available. This also guarantees that you will get the shares you want, but there is a problem with market orders. Since you can not dictate the price you are willing to pay per share, you will be subject to price volatility.
What does that mean? Picture this scenario:
When you see how much you paid, you may be surprised, especially since you had seen that the lowest asking price had been $1.10.
Another scenario: What if someone else put in a market order seconds before you, and gobbled up all the lower-priced shares? You may find that you get all 4,000 shares at $1.85.
Consider another example just to make sure I am explaining it well enough:
This would leave the current asking price of ABC at 8,000 shares at $1.15, while the bid would probably remain wherever it was previously.
Market orders can be dangerous with penny stocks due to their low trading volume, as discussed above.
A Limit Order Example:
You want to trade shares, but are only willing to authorize the trade at a certain price, or one that is even better for you.
For example, you want to buy 5,000 of ABC at $0.80 or less. Given the above example (ask prices = 2,000 shares @ 75 cents, 1,000 @ 95 cents, 10,000 shares @ $1.15), you would yield 2,000 shares at $0.75 and that is where the trading would end. 3,000 shares would go unfilled unless someone offered to sell at $0.80 or less during the duration of your order.
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