factoring business

By Jimmy Dawn


When you are trading stocks under it is known as a nano stock, a microcap stock, or a penny stock. Generally speaking these terms are pretty interchangeable. Although, in a broader sense a penny stock represents the total value of a business's outstanding common shares, or rather it's market capitalization, as opposed to the stock price. But there is no true definition of just what a penny stock is.

The market capitalization of a business, otherwise known as the market cap, is equal to the company's current stock price multiplied by the number of shares of stock outstanding. The performance of this simple exercise in mathematics will result in the total dollar value of all of a company's shares at a precise point in time. Penny stocks, unlike most stocks, trade in the over-the-counter (OTC) market as opposed to being listed on one of the stock exchanges. In the case of most stock transactions, an investor will employ an agent to act on his behalf to set up a transaction with a third party. This broker, as the agent is routinely called, will then earn a commission for expediting the transaction.

In contrast, the majority of penny trades are listed as principle transactions by agents. This indicates that the agent does not earn a commission, but instead earns an income on the spread, and by making the trades at beneficial moments. Penny stocks are not traded at a set amount, but instead, they are traded at a variety of prices. The spread is defined as the asking price minus the bid.

With penny stocks the spread is around 25% on average, but regularly rises to as much as 50% or even 100%. On a penny stock there will always be two asking prices, and two bids, they are known respectively as the "outside" and "inside" ask and bid. It's the outside bids and asks that will carry the most interest. Mark-up pricing is also a factor when it comes to investing in penny stocks. This occurs when a broker holds a penny stock in their account and will assume some risk due to changes in market prices.

Investing in penny stocks is a complex undertaking with many difficulties, not to mention the millions of dollars of loss, but even so, many firms will trade them, for example, to assist aspiring start up companies. Of course, the recommended method of determining a satisfactory investment is by seeking the advice of your broker.But in the penny stock market one must be forever cautious of brokers who may simply be trying to sell stock and probably do not have your welfare as their primary motivation.

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