Deal or no deal?
Many retail investors/traders, however, are lured into looking at very low priced stocks (aka “penny stocks”) such as those that trade well under the $5 mark. But, as we noted above, many of the really big players aren’t going to be able to purchase them, so if you buy a “penny stock” who can you expect to sell it to? Well, your options are limited mostly to other retail investors, or some very speculative institutional buyers/funds and market makers. Translation: with fewer people in the market for these types of stocks, there are fewer likely customers and fewer likely customers means less reliable pricing of what the company is actually worth. Remember that the greater the number of participants in the market the more likely there will be somebody to buy shares from you should you choose to sell.
The reason stocks trade where they do is because of belief or perception of value and perception of risks. If the belief of the majority is that more can go wrong than can go right, that pessimism shows up in as low or declining stock price. On the other hand, if there is a belief that a company can do no wrong, those expectations show up as a rising stock price. Typically companies go through cycles where investors shift between one extreme or the other, however occasionally you will find a stock that has a long stretch of investor optimism or pessimism – as signaled by either rising or falling prices respectively.
So what’s the bottom line?
Savvy investors and great traders understand that when buying and selling stocks online, they need to have another party on the other end of that transaction in order to realize a profit. They understand that if there are no customers, for whatever reason, they (the holder of the stock) might be left “holding the bag.” For that reason, great traders take the time to learn their market, who their customers are, what they are looking for and what keeps them away. When you start treating trading or investing like a business person, the time to ante up or the time to fold and walk away will be much clearer.