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| Penny Stock Basics |
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| If your not exactly sure what a stock is and how the price of stocks are quoted, you may want to read on. There are millions upon millions of companies in the U.S. and abroad. The vast majority of them are private entities that do not have any stock available to the public, most of which are small businesses. Larger and growing companies tend to go public in order to raise much needed funds for a variety of functions, although not all big companies are public. The flip side to this is that once a company is public, any other company or individual with enough cash can buy up more than 50% of the companies shares, and effectively own it. Each stakeholder in the company essential gets one vote per share on important issues. A company generally has several different classifications within their share structure, including preferred and other types that can have more powerful voting rights . Shareholders vote on new board members and key decisions the board puts forth like issuing new shares or initiating a stock split. They also appoint officers to manage and administer the day to day operations of the company such as the Chief Executive Officer(CEO), Chief Financial Officer(CFO), and others. When a company goes public, they cannot simply sell shares on the open market to anyone. They must first find a brokerage firm or several firms willing to buy up a ton of shares, and then sell them to other brokers and eventually put them on the open market. Throughout the process of consulting with brokerages and institutions and deciding on the amount of shares and at what price to offer them, the company will file the proper paperwork with the Securities and Exchange Commission(SEC). The brokerage firm(s) may help the company try to time the Initial Public Offering(IPO) for ideal market conditions. Often, some brokerages may offer the opportunity to get in early on an IPO, especially those firms that are involved with the deal, although there is no guarantee of gaining an advantage doing this. |
| Once a company goes public, it's shares trade on the open market similar to the way an auction works. Each share that is traded has to have a buyer and a seller. There are many different kinds market participants including Retail investors, Brokerages, Institutions and Market Makers. Retail investors are individuals that buy or sell shares from or to brokerages or institutions. These firms will typically have their own market makers(MM's), and some MM firms exist independently. MM's are on the front lines of the actual transactions and all shares that are bought or sold go directly through them. They provide the liquidity for a brokerage firm to be able to get quick executions when there is not always a buyer and a seller of the same exact number of shares at the same exact time. These MM firms that provide this liquidity are typically rewarded for their troubles by making money from trading all of these shares. They have a huge advantage over retail investors, huge amounts of capital and inventory of shares, as well as the ability to see a higher level of transparency. There are three types of quotes available, Level I, Level II, and Level III, although some of them may have different names within different exchanges. A level I quote will allow you to see the price and size(number of shares) of the last trade that went through, as well as the current bid and ask, which is the best price and size a market maker is willing to buy(bid) or sell(ask). A level II quote will allow you to see every market makers bid and ask price and size. A more heavily traded stock can have hundreds of market makers, while lighter traded issues including penny stocks will have less. A company must have at least one MM to be on an exchange, and most will have at least two or more. Both Level I and Level II quotes are available to all individuals and retail investors, Level III quotes, however, are not. These include all of the info from Level I, and II quotes, but add the ability to see all of the pending orders that are in the system from retail traders and brokerages. This includes limit orders that are placed by regular people where a specific buy or sell price and number of shares is given. |
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