NASD Bid & Ask
By William Cate
Published April 2000
[http://home.earthlink.net/~beowulfinvestments/] [http://home.earthlink.net/~beowulfinvestments/globalvillageinvestmentclubwelcome/]
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/globalvillageinvestmentclubwelcome/]
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/globalvillageinvestmentclubwelcome/]