Expert: Paul Henneman - 8/22/2006

Question
Hi Paul I have a simple question for you. I'm a beginner and as of now just playing with demo trading accounts. I noticed in this "CyberTrader" program I can name what price I want to buy or sell a share at. Provided I don't stray too far from the current price the trade goes through. On a $2.10 stock I could buy at $2 or sell at $2.20.

I realize the price shown for a stock isn't necessarily what every buyer/seller is willing to settle on. But I've never heard anyone mention this kind of bartering. They act as if the price quoted is set in stone. If this is a normal everyday thing for real investors how do I best use it to make money?

Any explanation or links would be much appreciated. Thanks!

Answer
Kyle,
   Thank you for your question! Yes, what you refer to most likely references the differences between 'bid', what you state you are willing to pay, and 'ask' price, which is what a currrent stock holder is willing to sell at. This really only becomes significant in smaller, less liquid stocks where there is not much trading. For most stocks, this process is so small as there is little that an individual investor can capitalize on. If you do plan on trying some investments with small companies, you can set what you are willing to pay, or if you hold the stock when you are willing to sell.
  I do have to say that I do not recommend investing in the smaller, less liquid companies, particularly if you are a beginner. True there is some money to be made, but it is very risky and it is actually more likely that you will lose money, particularly in the current market as volatility has been higher.
 You can also think of this in terms of a time frame. Usually you can set how long your offer will hold. For example, if you are interested in a company that is currently trading at 2.10, and you do a bunch of research and determine that it is a good buy at 2, then you can put in the order at 2 for a certain time period. If the price drops to that level within the time period you specify, then the stock is automatically purchased for you. The same applies if you already own the stock. You can set a price target that you want to achieve, and the stock will automatically be sold when it reaches that level.
  Two notes on this. One, be sure to check fees for this, as you do not want any profits to be eaten up by high trading costs. Secondly, this is more of an intermediate or even advanced strategy to put into place. It is difficult enough for even experts to determine if a stock will simply go up or down. To add the complexity of trying to determine these exact buy or sell points adds another level of complexity. It can be used however very effectively as a loss stop. If you place a sell order for say 10% or 15% below the current stock price, you will then be sure that you will not lose too much if the stock runs away on the downside.  It is a good way to minimize your losses in the event the market, or that particular stock, does not go your way.
  Another effective way to use this sort of thing is if you prefer to pick a small number of stocks and follow them closely, as opposed to trying to track and follow a large number of stocks. Some investors focus on a dozen stocks or so, and use strategies like this to try to book profits on small rises, then avoid the small declines. Again this requires a level of skill and dedication in terms of time that may be beyond you for the momement, and if it interests you I would encourage you to save this for the future.
  I hope this helps, please do not hesitate to follow up with me if I can be of any further assistance,

Sincerely,
Paul Henneman
President
ValuEngine, Inc
ValuEngine.com