Expert: Steven Taylor - 5/17/2009

Question
QUESTION: Hello. I am new to stock trading and would like to know that if I buy about 20 000 stocks for 0.01 each and all of a sudden the price of the stock goes up to 0.02 in the same day is it guaranteed that I could sell all the stocks for that much? Is bid price exactly the same as how much the stock is worth currently? If not then it the stocks are doing 0.02 a stock and the bid price is 0.015 for example then I will have to sell it for 0.015?

ANSWER: Paul, I wish it were that easy, but it is not. First, low-priced stocks don't often double very often. There is usually many reasons why a stock is trading for 1 cent, and none of them are good.

Because of those reasons, stocks trading on Canadian exchanges that are trading for those prices tend to have little volume. Not many people are in the market to buy 1 cent shares, since the companies are often on the verge of delisting, reverse splitting, or going out of business entirely. You could have a difficult time even accumulating 20,000 shares, especially if you bid for it. If you put in a "market order", you buy on the Ask (or "offer") and sell on the Bid. For low priced stocks, the spread between the bid and offer can be a large percentage, which means if you want to trade in any kind of volume, the stock may have to double just for you to break even.

Of course, you could also use limit orders, but again, for low priced stocks, that can be very difficult. It is not unusual for low priced stocks to have massive amounts of shares on both the bid and offer, and with the low volumes, the company may be long gone (or delisted, or cease-traded, or conducts a reverse stock split) before your bid or offer even comes within range.

You could always try paper-trading some of these stocks, which would give you a better feel for how they trade. If you do that, make sure you have a reliable bid/offer feed, as well as the amount of shares at the bid/offer so you will know if you put in a theoretical bid or offer if it would have been filled.

---------- FOLLOW-UP ----------

QUESTION: Hello, I know of a penny stock that goes up to 0.02 from 0.01 every day and it has a volume of at least 500,000 per day. I was planning on buying it for a penny and then when it becomes 2 pennies per stock I sell it. I have no interest at all in keeping these penny stocks for more than one day. I don't know what you mean by penny stocks rarely doubling, I know of a lot such as this one. Is your recommendation still not to buy it?

Answer
Paul, it may trade at 1 and 2 cents every day, but isn't that just trading between the Bid and Offer? If so, my first answer stands - the stock will likely have to double (on the Bid) for you to break even, as it may be very difficult to buy on the bid at 1 cent and sell on the offer at 2 cents. As I suggested, check the bid/offer and the size of the order book on each, and see if you can actually buy at the bid and sell at the offer.