Bid / Ask

Penny stocks do not each have a single price at which they are bought and sold, but a number of
different prices. The first difference is between the bid price and the ask price. The bid price is how
much someone is willing to pay for the security, or the price at which you could sell your shares. The ask price is how much someone will sell their securities for, or how much you will have to pay.
The difference between the prices is the spread.

The spread

To most investors, the spread represents a built-in loss at the time of investment. For example, if you purchased a stock that traded at 1/2 cent bid, 1 cent ask, the bid would have to more than double in price for you to break even (the “more than dou-ble” comes from additional costs such as “ticket”charges and other miscellaneous costs). Many in-vestors buy penny stocks believing that “trading at 12½ cents” means that they can buy and sell at 12½ cents. This simply is not the case, and any salesperson who uses such a phrase is only telling half of the truth. The spreads in penny stocks are most commonly 25-33%, are often 50-100% and sometimes are over 100%.

Another factor to keep in mind when evaluating price information about penny stocks is that there are two “bid” and two “ask” prices, the inside and outside bid and ask. As a general rule, the price you will be interested in will be the outside bid and ask, or the lower bid and the higher ask, as those are the bid and ask prices to public customers.


The last pricing factor concerning penny stocks is called the mark-up. A broker-dealer who has held the security in its account and subject to the risk of market price fluctuation, may mark the price of the security it sells to you up by a certain percentage,on top of the spread. This is to compensate bro-ker-dealers for maintaining inventory sufficient to supply demand for an orderly and liquid market.What it means to the average investor is another cost that creates a built-in loss at the time of in-vestment. In other words, the instant your transac-tion is effected, your securities are worth less than you paid for them.
Although it is no guarantee of a good price, you are more likely to get a better price in an agency transaction using a broker-dealer that has no inter-est in the transaction, due to the pricing factors above. In the typical penny stock transaction, the broker-dealer buys from its customers at the bid and sells at the ask, capturing as compensation the
spread, plus any mark-up.

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