| Most investors know that stocks priced under $5 are | | | | wondering what the spreads of penny stocks look |
| microcap stocks or penny stocks. But is that | | | | like? These fluctuate as you might expect. They vary |
| definition complete on its own? A better definition of | | | | between 25-34% but they could be upwards of that |
| the penny stock should include references to the | | | | too. One important thing to note is that there are |
| market capitalization (aka market cap) of the | | | | two ask and bid prices- inside bid/ask and outside bid |
| company instead of just the price. | | | | ask. For investors, the outside bid/ask is most useful. |
| The calculation of the market cap of a company is | | | | Don't forget that penny stocks can be marked up. |
| fairly simple. You take the number of shares that | | | | This is often because the broker holds shares of |
| have been issued by the company and multiply it by | | | | stock in his account and assumes the risks involved |
| the stock price. So, if company X has 10,000,000 | | | | due to big price changes. |
| shares outstanding and the price of one share of | | | | You are probably wondering why is all this so |
| stock is $2, then the market cap = 10,000,000 X 2 = | | | | complicated? You might also have heard stories of |
| $20,000,000. Using this number you can quickly figure | | | | problems associated with trading these stocks as well |
| out the size of the company. Coming back to penny | | | | as the millions of dollars lost. Then why do companies |
| stocks. These stocks don't usually meet the listing | | | | still issue penny shares and why do investors trade |
| requirements for most exchanges and are usually | | | | these? Companies still issue penny stock because |
| available Over-The-Counter (or OTC). Most of the | | | | they want to get their hands on as much working |
| stock is traded by means of a broker who will be | | | | capital as possible. This helps address their cash flow |
| arrange the buy/sell trade between the investor | | | | needs and its especially useful for struggling |
| (you) and the seller (the company). | | | | companies looking to get off the ground. Investors |
| In all these penny stock trades, the brokers make | | | | trade these with one motivation - big profits. There |
| money through principle transactions. In simple terms, | | | | are opportunities to make stellar profits through |
| they are not making any commissions on the trade | | | | these investments or of course make steep losses. |
| itself, but they profit on the price spread. The key | | | | The difference between the two is in picking the |
| thing to note here is that penny stocks aren't | | | | diamonds in the rough. Your broker, who has your |
| available at one fixed price. They are available at | | | | best interests in mind, can help you navigate these |
| different prices. It is the difference between the ask | | | | waters. |
| and bid prices that is called the spread. Are you | | | | |