Welcome to post #2.
We discussed in the first post that lower volume on penny stocks can cause you to be stuck with a lot of stock you can't sell.In the first post we discussed how with lower volume penny stocks can make you end up holding stock that you can't sell. So what you have to check for before you click on the buy button so you don't step on a landmine is what we are going to talk about today.
It is known as Bid-Ask Spread.
Most beginners will see a stock chart, and the number that is flashing on the big screen at the top of the chart is what they will think of when they see it: “Ok, it's 10 cents.”
But that's a lie. The stock market is not a "one-price" market. There are always 2.
Sellers' Ask: The price they want to accept. It’s what you have to pay to buy the stock.
Bid: The price a buyer is willing to pay. This is the amount that you'll receive whenever you sell the stock.
So, let's return to our old fashioned, blue chip example of yesterday. Now take a look at a large firm, the Bid is $150.00 and the Ask is $150.01. The difference between them (the Spread) is merely a penny! It's tight. Safe.
Let's now examine a sketchy penny stock.
You click on the quote for XYZ Corp. The large number with the big letters indicates 10 cents. However, a closer look at the price of the Ask and the Bid shows that the Ask price is at 10 cents while the Bid price is at 5 cents.
Here is the trap.
When you become excited and click 'buy', your broker executes your order at the Ask. You only bought them at 10 cents per share.
Now, if you suddenly decided you don't want it anymore. Three seconds later you press "sell. Your broker must locate a buyer and then they sell to the Bid. Which is 5 cents.
You just lost 50% of your money. In three seconds. Without any price changes to the stock.
The Spread is that big difference that in penny stocks is just brutal. The gap is exploited by market makers and brokers before the stock gets a chance to improve.
If the bid/ask spread is very wide on a penny stock, be wary and move on. Just close the app. It implies no liquidity and you are entering the trade in a large hole.
If these stocks are so dangerous, and the spreads are so bad... why do these stocks shoot up 300% in one day?
So, then, to the pump. We'll be discussing in post #3 how that orchestrated game works.