All About Penny StocksUnderstanding Penny Stocks by Peter Leeds

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Trading Stocks

Trading stocks is quite simple, and it is not any different whether you are dealing with penny stocks and penny stock picks 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 penny stocks.

The first thing you need is a broker. There is much more about getting a good stock broker in an upcoming section. 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 penny stocks' 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 penny 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 penny stocks you have your eye on.

It really is that simple.

Now, it's time to make a decision!

Option One - Keep it Simple: If you are comfortable with the simplified version of trading I provided above, and are ready to get into more specific detail about buying and selling penny stocks, then continue with the next section, entitled buying penny stocks.

Option Two - Learn the Most: If you want to learn the inner workings of the stock exchanges and trade orders, keep reading below. The following information is not needed to trade and profit from penny stocks. However, it will help you make better and more profitable trades.

I will throw a lot of terms at you in this section (bid, ask, volume...) but understand that I am intentionally over-complicating the issue.

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 for penny stocks, and they worry about matching it up with other orders at the market.

In the following discussion we will use ABC Corp. as our penny 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 penny stock, but I will not be delving into them at this point, simply so I can keep my explanation easy.

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, especially when it comes to penny stocks. 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 penny stocks starts right here:

Bid: The amount a hopeful investor is willing to pay for shares of a company.

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.