The Nature of Stocks and Their Markets
Besides money, the only thing you need to start investing is a stock broker. Your broker will be the individual or organization that have execute your buy and sell orders. They will have an account for you which is just like a normal bank account, except that it can contain not only cash, but stocks and bonds as well. Money from the sale of shares will go into this account, and cash to buy shares will be taken from this account.
There are two types of stock brokers which you can choose between, full service and discount. Each has advantages and disadvantages, as discussed below.
Full Service Stock Brokers
Full service brokers will give you advice and investment recommendations. However, they do have very high commission fees and are usually only suitable for investors who have a great deal of money to invest and who do few trades. For penny stock investment, the frequency of trading and the small amounts of capital per trade make full service brokers inappropriate, because their commission fees will be too high. You may be required to pay as much as $100 or more to have your full service broker buy you some shares, and just as much again when you sell.
Discount Stock Brokers
Discount brokers can answer any investment questions you may have, but they offer fewer personalized services for their clients, such as making stock recommendations or giving you portfolio advice. These are the brokers you see on television, advertising $10 or $20 a trade commission fees. When you buy or sell stock, you will be required to pay this lower commission rate, and can therefore keep more of your own money in your pocket.
As well, with discount brokers you can often monitor your account and execute trade orders from your computer or through an automated telephone system. With the computer system you are able to see all of your open buy orders, check market indexes and get stock price quotes. On-line discount brokers are best for anyone investing in penny stocks, as you are able to check prices anywhere there is a modem, and as many times as you like throughout the day.
When you’ve chosen which broker you want to establish an account with, simply contact them and they will help you fill out any forms and set up your account. You generally will need an initial deposit of cash. Getting your account running and ready for trading is simple and should not take more than three days.
When you want to acquire shares of a stock, you give your broker a buy order. Make sure you have enough money in your account to cover the cost of the shares, as well as the commission fee. You will need to know the following;
1. The ticker symbol of the stock (i.e.- COMX is the ticker symbol for Comtrex Systems)
2. The market the stock is trading on (i.e.- NASDAQ)
3. How many shares you want to acquire. This is also referred to as the volume. With penny stocks you should always buy in multiples of 1000 shares, as you may be otherwise subject to extra commission charges from your broker.
4. The price you are willing to pay for the shares. A ‘market’ order means you are willing to pay the best available price at the time. A ‘limit’ order means you will specify a price which you are willing to pay, and your trade will only take place if shares reach that price. We strongly suggest the use of limit orders, to increase you control over the transaction and to avoid price volatility.
5. The duration of your order. For example, you may keep your order good for just that trading day, or have it good every trading day until it expires on the date you specified, which may be weeks later.
Thus, an example order you might enter would be; “I wish to buy 6000 shares of Lore Diamonds, ticker symbol LOR, at 19 cents or less. The stock is on the Vancouver exchange, and I want this order to stay active until Friday of this week.”
If the price of LOR hits 19 cents or less, your broker should acquire the shares for you. You will find that 6000 shares of LOR have been added to your account, and the money for them has been taken out (6000 shares * $0.19 = $1140 + commission fee).
A sell order is simply the reverse process of buying. Make sure you know how many shares you have in your account when selling a stock. Tell your broker; “I wish to sell the 6000 shares of Lore Diamonds from my account. The ticker symbol is LOR, and the stock is on the Vancouver Stock Exchange. I want to sell at 24 cents or higher, and keep the order good for the day.”
If the price of LOR hits 24 cents or higher, your shares should be sold and the money from the transaction (6000 shares * $0.24 = $1440 – commission fee) deposited into your account within three days, ready to be used in another purchase.
Special Trading Notes
When trading on an exchange, investors either enter a bid price (if they are buying) or an ask price (if they are selling). When a bid and ask price meet at an agreed price, a trade takes place. In other words, if you are willing to pay 24 cents per share for a stock, and someone is willing to sell shares of the same stock for 24 cents, you will exchange the shares for the cash.
At any one time there are usually several buy orders and sell orders all at different prices for a given stock. However, when you check a stock quote you will only see the highest bid price and the lowest ask price, representing the most that investors are willing to pay for the shares, and the lowest price at which shareholders are willing to sell, respectively.
Due to the ‘best price’ priority, your order to buy stock will not get filled until all buy orders of a higher price are filled first. Similarly, your sell orders will not get filled until sell orders of a lower price are filled.
For orders to buy (or sell) stock that are entered at the same price as other similar orders, preference will be given by the exchange in the order in which they were received.
Due to the above mentioned ranking order, and the often light volume of shares trading, you may not always get your order filled. You may put in an order to buy at a certain price, and find that the shares did not trade at that price during the duration of your order, and therefore you did not make the transaction. There will be no broker fee when no trade takes place.
You may also find that you got your order partially filled. You may want 8000 shares of a stock, but only get 2000. This is because only 2000 shares were available at the price you had stipulated. This applies to both buying and selling. If you notice that this may be the case mid-day, you can respond by adjusting the price of your order to ensure you trade all the shares you want. You will not get an extra commission for that. However, if your order spans several days and is partly filled on more than one day, you will get a commission charge from your broker each day you trade shares.
Canceling and Changing Open Orders
Buy and sell orders can be canceled or changed during their duration. Consult your broker for more information about changing open orders.