The Two Ways To Buy And Sell Penny Stocks
There are two primary ways to buy penny stocks. Either you buy the penny stock at the offer price, or you attempt to purchase it at any price under the offer, including, but not limited to, the bid, using a limit order.
There are two ways to sell a penny stock. You sell the penny stock either at the bid price or at any price above the bid, including, but not limited to, the offer, using a limit order. As is the case with both buying and selling, either you are initiating the action, or someone else is initiating a trade against you. By contrast, when you buy stock on the offer or sell stock at the bid, you are initiating action against another party, be it a market maker or another trader. The other party has already determined the price at which he wishes to make a trade (this can be referred to as a limit order or could be the actual bid or offer price as is the case with a market maker), and you are reacting, or initiating action against this price.
When you buy a penny stock on the bid or any price under the offer or sell a penny stock on the offer or any price above the bid, another trader or market maker is electing to trade with you. You have already entered a limit order, and another party has come and “hit” your bid or “taken” your offer. The most important thing to remember is that when you initiate action, it is in anticipation of the stock continuing on the path of momentum on the side of the market on which you are trading. If you buy a penny stock on the offer, then it is in anticipation of price appreciation and vice versa on the sell side. Traders initiate in this manner when they open a trade or when they are forced to cover an existing position.
On the other hand, when you are buying a penny stock under the offer or selling over the bid, another trader knows or thinks that the stock is going in that direction. The other trader is initiating action against you. This other trader could be someone who is covering a position that has gone against him and he is being forced to “pay the spread,” or the trader could be an institutional trader who simply has an order to buy or sell the penny stock. When you buy or sell penny stocks in this manner, you are usually covering a trade that is going in your favor or opening a position with the anticipation that the current momentum in the stock is close to a saturation point and the stock is about to reverse direction.
Remember, no traders are ever going to sell you stock if they think or know it is going up, and no traders are ever going to buy stock when they think or know it’s going down. The only exception is if they made a mistake, which is very rare, or if they panicked. It is still a rational market in that the players are not altruists. They’re not there to give away their money. These distinctions become extremely important as you become more involved with the market-maker game, since the manner in which you enter your trade will determine not only your risk but your potential profit as well.
Dan Cohen is an author for the website Stock Trading Instruction:www.stocktradinginstruction.com/pennystocks.htmlStock Trading Instruction offers an online stock trading video course which specializes in trading penny stocks.
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