NASD Bid & Ask
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/]
