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