Investment & Financial Articles
Title: NASD Bid & Ask
Author: William Cate
Article:
NASD Bid & Ask By William Cate Published April 2000
[http://home.earthlink.net/~beowulfinvestments/]
[http://home.earthlink.net/~beowulfinvestments/globalvillageinves
tmentclubwelcome/]
Nasdaq and the Over-the-Counter Bulletin Board (OTCBB) trade on
a Bid and Ask format. Bid is the price an investor is willing to
pay for a stock. Ask is the price that a shareholder is willing
to sell the stock.
The spread is the monetary difference between the Bid & Ask
price. A stock with a bid of ten cents and an ask of twenty-five
cents has a spread of fifteen cents. If the spread is wide, for
instance a bid of twenty-five cents and an ask of two dollars,
few shares trade. If all other factors are equal, a narrow
spread increases the stock's trading volume. You can use the
spread to regulate the trading volume.
If there's a Bid, without an Ask, the share price is likely to
move up. This is a situation where the buyers are seeking to
form a market. If there's an Ask without a Bid, the stock will
collapse.
Trading volume equals liquidity in a stock. Most shareholders
are locked into Penny Stocks. They can't sell at a profit,
without depressing the price of the stock. To create the
illusion of liquidity, some companies do round robin or wash
trades. The insiders trade the stock among themselves. The goal
is to attract investors by showing high volume trading. Stock
brokers love wash trades. However, the practice doesn't create a
strong shareholder base.
The issued stock of any company can be divided into insider
shares and the float. The public owns the shares in the float.
If you see a high volume stock, check the float. If it's small
the odds favor wash trading by the insiders.
Few buyers buy stock. They buy the right to own the stock from
their brokerage firm. Their right is reflected on their monthly
brokerage account statement. Essentially, their right is an
option issued by the brokerage firm to the client. It qualifies
the client for share price appreciation, if the stock moves up.
Of course, to benefit from share price appreciation, the
shareholder must sell their stock (option). Few public
shareholders sell in an upward moving Market.
Unless the buyer becomes a registered shareholder of the
company, the buyer doesn't own the stock. This fact allows
professionals to sell nonexistent stock. The sales are short
sales relying upon the shareholder accepting the brokerage
firm's account statement as an option on their stock. The short
sales add to the float. The short sales depress the company's
share price.
As a public company trading on the OTCBB or Nasdaq, you must
manage your Bid & Ask price. A well-run public company ensures
shareholder liquidity. OTCBB companies should offer liquidity
without creating the illusion of a large trading volume. The
company must make short selling difficult. The company's share
price must slowly move up. There's a time to build the company
and its shareholder base. There's a time to promote the stock.
If you lack the right shareholder base, your stock promotion
will end with a major decline in your share price.
To contact the author: Visit the Beowulf Investments website:
[http://home.earthlink.net/~beowulfinvestments/] Or, visit the
Global Village Investment Club Website:
[http://home.earthlink.net/~beowulfinvestments/globalvillageinves
tmentclubwelcome/]
About the author:
He has been the Managing Director of Beowulf Investments
[http://home.earthlink.net/~beowulfinvestments/] since 1981 and
is the Executive Director of the Global Village Investment Club
[http://home.earthlink.net/~beowulfinvestments/globalvillageinves
tmentclubwelcome/]
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