Categorized | Investing, Penny Stocks 101

Penny Stock Fundamentals


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Trading Penny Stocks

penny stock fundamentalsNot understanding the fundamentals of trading can get new investors burned for tons of cash. I see this happen a lot to beginners trying their luck in the stock market. They don’t fully understand the fundamentals and it costs them big! This is moreso true with penny stocks than anything else.

So how can you make sure you are not getting burned when you go to make an investment?

Here are a few simple rules and strategies you need to know!

1. Understanding Ask Price
2. Understanding Bid Price
3. Understanding Volume

 

The Ask Price

penny stock fundamentals ask priceWhen you are looking to buy penny stocks and high volatility securities one of the most important things you need to look at first is the Asking Price. The Asking price in this situation is far more important than the market price. The Asking price is the price that someone holding the penny stock or security is willing to sell it for. When you purchase a penny stock you are not purchasing it at the market price you are purchasing it from the lowest asking price seller.

Instead of being lazy and purchasing stocks at the market price you need to be firm on what price you are willing to pay for a stock. All online trading platforms and stock brokers offer you the option to purchase at market price or set a certain price that you are willing yo purchase the stock at. The last person who bought a stock sets the new market price. This happens when a seller lowers his asking price to meet the next highest bid or when the bidder highers his bidding price to meet the next lowest asker.

The reason why this is extremely important for penny stock investors is because there is often a very large spread between the ask price and the market price. If you purchase a stock at market you can be paying well over what you expected to pay for a security. This can be even more exaggerated when you purchase a large quantity of shares. In this scenario you could end up buying more shares than the lowest asker has to sell. Now you will pay his high price and you will also be paying a price of the second lowest asker as well. As this happens you will be increasing your average price per share. For new investors its best to set a price you are willing to buy a stock. Just pick a number you are comfortable with. Set a limit on what you are willing to pay per share and stick to it! If the price never goes that low than you can pass that stock up for another opportunity. People trade penny stocks because very little movement can generate huge returns. If you don’t set your price and just use the market price you are eating away at a huge percentage of that potential gain.

 

The Bid Price

bid price penny stock fundamentalsOn the other end of the spectrum you have the bid price. The bidding price is the price at which a person is willing to pay for a stock. this price is important for investors looking to sell stocks. For the reasons mentioned above when buying a stock the same hold true when you are going to sell a stock. You are not selling the stock at the market price, instead, you are selling it to the next bidder. Keep this in mind when you are purchasing a penny stock because eventually you are going to need to sell it. Is there a ready line of bidders available to sell your share to? I have seen the bidding spread be up to 25% or more of the market price. If you are not careful when you are purchasing and selling stocks you can take huge losses before you even purchase the stock, and when you go to sell it you can get hammered again. The bid/ask spread is one of the biggest penny stock fundamentals you need to understand and evaluate before you purchase any stock.

 

Volume

penny stock fundamental volumeVolume is another important aspect new investors often overlook. It is very important to investors of penny stocks, because volume indicates there is a steady market for the stock. If you are considering a penny stock that does not have a steady volume you will probably get hammered when you go to sell the stock. Just as you must be mindful of the bid/ask spread you need to be mindful of volume. If there is no volume there may not be ANY bidders for that stock. When there are no bidders the stock is completely illiquid and the value is for all intensive purposes 0. Stocks that no one else wants are worthless and without any available bidders you will not be able to sell the stock when that time comes. I have an old boss who is stuck in this position now with a penny stock he purchased. He is unable to sell the stock because there are no ready buyers. In this case, the price is definitely not worth the “market price” to sell the stock he would have to take about half of what the current market price is. Moral of the story, don’t end up like my old boss and make sure there is a market for the stock so you can sell it when you need to exit.

 

Penny Stock Fundamentals

As you can see from the 3 topics covered above penny stock fundamentals might be the most important part of your investing tool kit. Understanding how bid price, ask price, and trading volume affect the price of a particular stock is just as important as researching the stock and deciding if it is a good investment for your portfolio. It’s easy to underestimate the role each of these three fundamentals play in investing if you are used to trading mid to large cap stocks because a readily available list of buyers and sellers exist. In the penny stock universe you need to pay particular attention to the market that is available. By having a plan when you purchase a stock you will be able to sell your stocks easily, at the price you want, and most importantly turn a PROFIT!.

 

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