What is the 'Stock Market'?
-The "Stock Market" is a term used to describe the mechanism that enables the trading of company stocks. The market is made up of several 'Stock Exchanges' such as the NYSE, Nasdaq, Amex, and OTCBB. A stock exchange is where buyers and sellers come together to exchange their stocks.
When is the stock market open?
-The stock market is normally open Monday-Friday from 9:30am-4:00pm eastern time. There are extended hours in the morning and afternoon, but these don't apply to penny stocks trading on the OTCBB or Pinksheets. Most holidays result in closed, or "half" days.
What is 'Stock'?
-Stock is a financial device that companies use to allow people to buy a portion of ownership in that company. A 'share' of stock is one unit of a set number of equal portions of the company. Companies sell 'Shares' of stock to raise money for various types of business development.
What is a 'Stock Broker'?
-A Broker is essentially a middle-man that acts between buyers and sellers of 'securities'. The stock broker acts to initiate and complete the transaction between individual buyers, institutions, and 'Market Makers'. To act as a broker for securities such as stock, a license is required. Check out the next page to find out how to get your own broker.
What is a 'Market Maker'?
-A 'Market Maker', or MM for short, is a brokerage or bank that is supposed to create an orderly market for a stock. Market makers create a market by maintaining a 'bid' and 'ask' price on each stock they are participating in. The market maker should readily buy or sell the stock when their quoted prices have been met by another party. This is, of course, as long as bid or ask size is sufficient to cover the order. Market makers are critical to creating 'liquidity' and efficient trading for each security they participate.
What are 'Level II Quotes'?
-To see the bid and ask prices that market makers are providing for a specific stock, you need a Level 2 (Level II, L2) quote. Level 2 quotes show each market maker participating in a stock, their current highest bid and lowest ask, and the 'size' of their bid/ask. Unfortunately with pink sheet stocks in particular, the bid/ask sizes are very rarely accurate. Depending on the stock price they will normally only show a standard block size. 5000, 1000, 500, 100, etc. If the bid or ask is showing 5000 for example, the actual size could be 5000, or 500,000. There could also be orders in for less than 5000, or "All or None" orders placed that won't even show on the Level 2 quote.
One very common misunderstanding with level 2 quotes is that the bid/asks that are showing are representing the only orders there are. Remember, the only ones showing are the highest bid, and lowest ask for each market maker. For example, if NITE (a very common MM on penny stocks) is showing an ask of .10, they could also have orders to execute at .11, .12, .125, and down the line. Often novice traders will see "only 6 MMs to .20!" when the current price is .10. The number of market makers to a certain price doesn't really matter, especially if the stock typically only has a few active MMs. It is the number of orders in for execution that counts, and those cannot be seen with level 2 quotes. In addition, not everyone puts an order in and lets it sit there. There could be people waiting to 'pounce' on either the buy or sell side, which can make the Level II picture even more deceiving.
Understanding and interpreting Level 2 quotes is critical to improving your penny stock trading performance. Check out the links below for more information.
- Introduction to Level II quotes
- Level II quote service providers:
NEW! Check out our new Level 2 Provider Feature Page, complete with details, reviews, pros and cons, screenshots and more!
EquityFeed - Real time "MegaTool" geared for penny stocks
AlphaTrade - Capable and affordable streaming Level II platform
Bloomfield Investment Club - Affordable streaming Level II quotes
QuoteTracker - Streaming real time Level II, news, charts
QuoteStream - Streaming real time Level II, news, charts
- Free Level II Quotes:
None known of at this time... EquityFeed and some others have free trial periods. If you find a source of free Level 2 quotes let us know!
What is the legal definition of a 'Pattern Day Trader' or 'PDT'?
-An individual is categorized by the SEC as a 'Pattern Day Trader' or PDT when they buy and sell one or more securities (a stock for example) in the same trading day at least four times in a five day period. The individual's same-day trades must also make up at least 6% of their activity during that five day period. For most people that day trade, their activity doing so will far surpass 6% of their total activity. However, if one makes a lot of trades, but holds the most of the positions for more than the day it is possible for your day trade activity to be 6% or less. Pattern day traders are subject to special rules.
What are the Pattern Day Trader rules?
A pattern day trader must maintain an brokerage account balance of $25,000. This includes both cash and marginable securities. Technically this requirement is only necessary when the PDT is using a margin enabled account, but in practice most brokers require the $25K balance for margin and cash accounts. If you do not have, or do not maintain the minimum balance and engage in PDT activity your account will be frozen (you will not be able to buy securities) for 90 days, or until your balance is back above the $25K threshold.
What is 'Margin'?
Margin, when referring to a stock brokerage account, is essentially borrowed money that is used to buy a security. Think of margin as a type of loan, or credit line that the broker provides to its clients. Traders can use margin to increase their "buying power", the money available to buy securities/stock. Trading with margin can be very risky, since you can lose more money than you put into your account. Using margin to avoid fund settlement restrictions can be helpful, though. Just remember how much real equity you hold in your account to avoid over-extending your account with margin, and also remember the Pattern Day Trader rules (see above) to avoid any account restrictions. We recommend that new penny stock traders stick with a cash account to start.
What's Next?
-Now that you know some stock market investing basics, and what you need to start trading penny stocks, let's discover how to buy penny stock and select a stock broker that fits your needs.
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