Here is a list of some of the most common questions we receive from readers.
We hope you find it useful.
- What are Penny Stocks
- What is the OTC BB?
- What are the Pink Sheets?
- What's the difference between Pink Sheets and OTC BB?
- What is a market order?
- What is a limit order?
- What is a stop loss order?
- What is a stop limit order?
- What is a Good 'Till Canceled Order?
- What is Level 2?
- What is a candlestick/ candlestick chart?
- What is fundamental analysis?
- What is technical analysis?
- What is support?
- What is resistance?
What are Penny Stocks?
A penny stock is a stock that trades at a relatively low price and market capitalization, usually outside of the major market exchanges. These types of stocks are generally considered to be highly speculative and high risk because of their lack of liquidity, large bid-ask spreads, small capitalization and limited following and disclosure. They will often trade over the counter through the OTCBB and pink sheets. The term itself is a misnomer because there is no generally accepted definition of a penny stock. Some consider it to be any stock that trades for pennies or those that trade for under $5, while others consider any stock trading off of the major market exchanges as a penny stock. However, confusion can occur as there are some very large companies, based on market capitalization, that trade below $5 per share, while there are many very small companies that trade for $5 or more.
The typical penny stock is a very small company with highly illiquid and speculative shares. The company will also generally be subject to limited listing requirements along with fewer filing and regulatory standards.
The OTC Bulletin Board® (OTCBB) is a regulated quotation service that displays real-time quotes, last-sale prices, and volume information in over-the-counter (OTC) equity securities. An OTC equity security generally is any equity that is not listed or traded on NASDAQ or a national securities exchange. OTCBB securities include national, regional, and foreign equity issues, warrants, units, American Depositary Receipts (ADRs), and Direct Participation Programs (DPPs).
What are the Pink Sheets?
The Pink Sheets are a centralized quotation service that collects and publishes market maker quotes for OTC securities in real-time. Pink Sheets is neither a Securities and Exchange Commission (SEC) Registered Stock Exchange nor a Broker-Dealer
What’s the difference between Pink Sheets and OTC BB?
Pink Sheets and the OTCBB are competing quotation services for OTC securities. Pink Sheets is a privately owned company, while FINRA operates the OTCBB. Unlike the OTCBB, issuers do not have to be fully reporting companies with the Securities and Exchange Commission (SEC) to be quoted on Pink Sheets. The Pink Sheets' OTC Dealer provides market makers with dynamic tickers and quote montages and an electronic trade negotiation system, while the OTCBB does not provide this functionality.
What is a market order?
Market orders are orders to buy or sell stock immediately at the best available current price. A market order is sometimes referred to as an "unrestricted order".
A market order guarantees execution, and it often has low commissions due to the minimal work brokers need to do. Be wary of using market orders on stocks with a low average daily volume: in such market conditions the ask price can be a lot higher than the current market price (resulting in a large spread). In other words, you may end up paying a whole lot more than you originally anticipated! It is much safer to use a market order on high-volume stocks.
What is a limit order?
Limit orders are orders placed with a brokerage to buy or sell a set number of shares at a specified price or better. Limit orders also allow an investor to limit the length of time an order can be outstanding before being canceled.
Depending on the direction of the position, limit orders are sometimes referred to more specifically as a buy limit order, or a sell limit order. Limit orders typically cost more than market orders. Despite this, limit orders are beneficial because when the trade goes through, investors get the specified purchase or sell price. Limit orders are especially useful on a low-volume or highly volatile stock.
What is a stop loss order?
A stop loss order is an instruction to sell at the best available price after the price goes below the stop price. A stop loss price is always below the current market price. For example, if an investor holds a stock currently valued at $50 and is worried that the value may drop, he/she can place a sell stop order at $40. If the share price drops to $40, the broker sells the stock at the next available price. This can limit the investor's losses (if the stop price is at or below the purchase price) or lock in some of the investor's profits.
What is a stop limit order?
A stop limit order is an order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will be executed at a specified price (or better) after a given stop price has been reached. Once the stop price is reached, the stop-limit order becomes a limit order to buy (or sell) at the limit price or better.
The primary benefit of a stop-limit order is that the trader has precise control over when the order should be filled. The downside, as with all limit orders, is that the trade is not guaranteed to be executed if the stock/commodity does not reach the stop price.
A stop order is an order that becomes executable once a set price has been reached and is then filled at the current market price. A limit order is one that is at a certain price or better. By combining the two orders, the investor has much greater precision in executing the trade. Because a stop order is filled at the market price after the stop price has been hit, it's possible that you could get a really bad fill in fast-moving markets.
For example, let's assume that ABC Inc. is trading at $40 and an investor wants to buy the stock once it begins to show some serious upward momentum. The investor has put in a stop-limit order to buy with the stop price at $45 and the limit price at $46. If the price of ABC Inc. moves above $45 stop price, the order is activated and turns into a limit order. As long as the order can be filled under $46 (the limit price), then the trade will be filled. If the stock gaps above $46, the order will not be filled.
What is a Good 'Till Canceled Order?
An order to buy or sell a security at a set price that is active until the investor decides to cancel it or the trade is executed. If an order does not have a good-'til-canceled instruction then the order will expire at the end of the trading day the order was placed.
n most cases, GTC orders are canceled by brokerage firms after 30-90 days. This type of order is traditionally placed at price points away from the price of the stock at the time the order is placed. For example if a stock you hold is currently $40 but you believe it will go to $50 at which point you will sell then, you can use a GTC order. Once the GTC order to sell is placed, if the price of the stock reaches $50 at any point over the next few months your shares will be sold.
What is Level 2?
A trading service consisting of real-time access to the quotations of individual market makers registered in every Nasdaq listed security, as well as market makers' quotes in OTC Bulletin Board securities. This allows you to watch the trades being executed right in front of you. Also known as Level II.
What is a candlestick/ candlestick chart?
A price chart that displays the high, low, open, and close for a security each day over a specified period of time..
There are many trading strategies based upon patterns in candlestick charting.
What is fundamental analysis?
Fundamental analysis is a method of evaluating a security that entails attempting to measure its intrinsic value by examining related economic, financial and other qualitative and quantitative factors. Fundamental analysts attempt to study everything that can affect the security's value, including macroeconomic factors (like the overall economy and industry conditions) and company-specific factors (like financial condition and management).
The end goal of performing fundamental analysis is to produce a value that an investor can compare with the security's current price, with the aim of figuring out what sort of position to take with that security (underpriced = buy, overpriced = sell or short).
This method of security analysis is considered to be the opposite of technical analysis. Fundamental analysis is about using real data to evaluate a security's value. Although most analysts use fundamental analysis to value stocks, this method of valuation can be used for just about any type of security.
For example, an investor can perform fundamental analysis on a bond's value by looking at economic factors, such as interest rates and the overall state of the economy, and information about the bond issuer, such as potential changes in credit ratings. For assessing stocks, this method uses revenues, earnings, future growth, return on equity, profit margins and other data to determine a company's underlying value and potential for future growth. In terms of stocks, fundamental analysis focuses on the financial statements of the company being evaluated.
One of the most famous and successful fundamental analysts is the Oracle of Omaha, Warren Buffett, who is well known for successfully employing fundamental analysis to pick securities. His abilities have turned him into a billionaire.
What is technical analysis?
Technical analysis is a method of evaluating securities by analyzing statistics generated by market activity, such as past prices and volume. Technical analysts do not attempt to measure a security's intrinsic value, but instead use charts and other tools to identify patterns that can suggest future activity. Technical analysts believe that the historical performance of stocks and markets are indications of future performance.
In a shopping mall, a fundamental analyst would go to each store, study the product that was being sold, and then decide whether to buy it or not. By contrast, a technical analyst would sit on a bench in the mall and watch people go into the stores. Disregarding the intrinsic value of the products in the store, the technical analyst's decision would be based on the patterns or activity of people going into each store.
What is Support?
Support is the price level which, historically, a stock has had difficulty falling below. It is thought of as the level at which a lot of buyers tend to enter the stock.
Often referred to as the "support level".
If the price of a stock falls towards a support level it is a test for the stock: the support will either be reconfirmed or wiped out. It will be reconfirmed if a lot of buyers move into the stock, causing it to rise and move away from the support level. It will be wiped out if buyers will not enter the stock and the stock falls below the support.
What is resistance?
Resistance is the price at which a stock or market can trade, but not exceed, for a certain period of time.
Often referred to as "resistance level"
The stock or market stops rising because sellers start to outnumber buyers.