What is the 'Stock Market'?

  The "Stock Market" is a term used to describe the mechanism that enables the trading of company stocks.The market is made up of several 'Stock Exchanges' such as the NYSE, Nasdaq, Amex, and OTCBB (Over-the-Counter Bulletin Board). A stock exchange is where buyers and sellers come together to exchange their stocks.

When people say "the market" did poorly, or well, generally they are referring to the overall index of a given market.

When is the stock market open?

The stock market is normally open Monday-Friday from 9:30am-4:00pm Eastern time. There are extended hours in the morning and afternoon, but these don't apply to penny stocks trading on the OTCBB or Pinksheets. Most holidays result in closed, or "half" days.

What is 'Stock'?

Stock is a financial device that companies use to allow people to buy a portion of ownership in that company. A 'share' of stock is one unit of a set number of equal portions of the company. Companies sell 'Shares' of stock to raise money for various types of business development.

What is a 'Stock Broker'?

-A Broker is essentially a middle-man that acts between buyers and sellers of 'securities'. The stock broker acts to initiate and complete the transaction between individual buyers, institutions, and 'Market Makers'. To act as a broker for securities such as stock, a license is required. Check out the next page to find out how to get your own broker.

What is a 'Market Maker'?

-A 'Market Maker', or MM for short, is a brokerage or bank that is supposed to create an orderly market for a stock. Market makers create a market by maintaining a 'bid' and 'ask' price on each stock they are participating in. The market maker should readily buy or sell the stock when their quoted prices have been met by another party. This is, of course, as long as bid or ask size is sufficient to cover the order. Market makers are critical to creating 'liquidity' and efficient trading for each security they participate.

What are 'Level 2 Quotes'?

To see the bid and ask prices that market makers are providing for a specific stock, you need a Level 2 (Level II, L2) quote. Level 2 quotes show each market maker participating in a stock, their current highest bid and lowest ask, and the 'size' of their bid/ask. Unfortunately, with pink sheet stocks in particular, the bid/ask sizes are very rarely accurate. Depending on the stock price they will normally only show a standard block size. 5000, 1000, 500, 100, etc. If the bid or ask is showing 5000 for example, the actual size could be 5000, or 500,000. There could also be orders in for less than 5000, or "All or None" orders placed that won't even show on the Level 2 quote.

One very common misunderstanding with Level 2 quotes is that the bid/asks that are showing are representing the only orders there are. Remember, the only ones showing are the highest bid, and lowest ask for each market maker. For example, if NITE (a very common MM on penny stocks) is showing an ask of .10, they could also have orders to execute at .11, .12, .125, and down the line. Often novice traders will see "only 6 MMs to .20!" when the current price is .10. The number of market makers to a certain price doesn't really matter, especially if the stock typically only has a few active MMs. It is the number of orders in for execution that counts, and those cannot be seen with Level 2 quotes. In addition, not everyone puts an order in and lets it sit there. There could be people waiting to 'pounce' on either the buy or sell side, which can make the Level 2 picture even more deceiving.

What are Penny Stocks?

Penny stocks are the stocks of companies with a 'market capitalization' or market cap, of less than $1 billion. A company's market cap is a measure of its total market value. It is determined simply by multiplying the price of a share of stock by the total number of shares out in the market ('outstanding shares').

Most often, the relatively low market cap that penny stocks have is due to a low price per share (PPS for short). Since it is a "small" market capitalization, penny stocks are also referred to as 'Small-Caps'. The price of a small-cap stock can have a wide range, therefore, depending on the outstanding shares. Generally, any stock with a PPS of 4.00 or less is likely to be considered a penny stock.

How do you buy penny stocks?

-For an ordinary person to buy penny stocks, they must have a 'broker'. A broker can be thought of as the middleman between you and the market. You tell the broker you want X amount of shares of a company, and it is the broker's job to fulfill the order. One can use a 'full service' broker to assist them with their trades, or a 'discount' broker such as TDAmeritrade, for example. A discount broker lets you enter your own trades through an online interface. This saves a lot of money on 'commissions' (the price you pay for each fulfilled order). A discount broker is recommended for buying penny stocks.

How much money do I need to buy penny stocks?

-The amount needed to start is a highly debatable subject. The more money you have to put into a stock, the less the stock will need to increase in price before you have covered the costs of commissions and realized a profit. On the other hand, more money in a stock means you have more money at risk. When you are ready to start trading, however, we recommend having at least $500 for each penny stock you wish to buy.

Depending on your trading strategy, and the liquidity of the penny stocks you're buying, you may wish to have substantially more money to make your trades. For example, if a penny stock has high liquidity you may wish to purchase a large position, (worth $1000, $5000, or even $10,000) and go for a short term "scalp" by selling the position for a small percentage gain. Instead of playing with $500 and going for a 100% gain, you could play with $5000 and go for just a 10% gain. The profit in these two cases is the same.

How many different penny stocks should I buy?

-To start, we recommend trading no more than 3 penny stocks at one time. You need to be able to concentrate and do homework (a.k.a. Due Diligence, or 'DD') on the stocks you own as well as stocks you are looking to buy next. If you have too many, your ability to do this will be limited, and chance of success will be reduced. Once you learn the ropes and have a substantial portfolio, you might consider having more "irons in the fire". Some traders will buy penny stocks that are cheap and dormant, and hold small positions in hopes that at some point at least one of the stocks will come "into play". Being in at rock bottom prices, available when nobody else is buying, almost guarantees nice profits should the stock run.