Stock Market
The "Stock Market" enables the trading of companies' stocks, with several stock exchanges (NASDAQ, OTCBB, Pink Sheets, etc.) accommodating penny stocks. Stock exchanges connect stock sellers and buyers. North American stock markets are generally open from Monday to Friday from 9:30 a.m. to 4 p.m. Eastern Time. The markets are closed on most holidays or there may be half trading days.
Stock
Companies sell shares of stock to raise money for their business development and allow people to buy a portion of ownership. A share represents one unit of a set number of equal portions of the company. Penny stocks usually represent the first opportunity for companies to become publicly traded.
Stock Broker
You can't trade stocks without a stockbroker, who serves as a middleman between buyers and sellers of securities or stocks. The stockbroker initiates and completes transactions between individual buyers, institutions and market-makers. Stockbrokers must acquire a license to do business.
Market-Maker
A market-maker is a brokerage or bank that creates an orderly market for a stock and creates liquidity and efficient trading for each security it participates in. Market-makers create a market by maintaining a "bid" and "ask" price on each stock. The market-maker buys or sells the stock when another party meets the appropriate price. Penny stocks often have only a few active market-makers.
Level 2 (II) Quotes
Level 2 quotes (Level II, L2) show the "bid" and "ask" prices that market-makers provide for a stock. 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. Bid/ask sizes may be inaccurate with penny stocks.
A common misunderstanding with Level 2 quotes is that the bids/asks shown represent all orders. In fact, they show only the highest bid and the lowest ask price for each market-maker. For example, if a market-maker shows an ask price of .12, the market-maker also may have orders to execute at .13, .14 and other prices.
The important figure is the number of orders for execution gathered by the market-makers, and Level 2 quotes don't show this number. Investors may wait to pounce on either the buy or sell side, making the Level 2 picture quite deceiving. But you still need to interpret and understand Level 2 quotes to improve your penny stock-trading performance. No service offers free Level 2 quotes, but some offer a free trial. See Level 2 quote providers on our Resources page.
Pattern Day Trader (PDT)
The SEC (Securities and Exchange Commission) defines an individual as a "Pattern Day Trader" (PDT) when he or she buys and sells one or more securities (stocks) at least four times on the same trading day throughout a five-day period. Their same-day trades must also make up at least 6% of their activity during that five-day period. For those involved in this activity, their trading will far surpass 6% of their total activity. If one makes a lot of trades but holds most of the positions for more than the day, it's possible for day trade activity to drop below 6%.
PDT Rules
New traders should avoid becoming PDTs. A pattern day trader must maintain a brokerage account balance of $25,000 (including both cash and marginal securities) and, as a new trader, you may not have or most likely never intended to put that kind of money into a brokerage account. If your trading changes to PDT status without having this minimum balance in your account, the brokerage will freeze your account (so you won't be able to buy securities) for 90 days or until your balance is back above the $25,000 threshold.
Margin
Margin represents money loaned by a broker to its clients to buy a security in a stock brokerage account. Traders may use margin to increase their stock-buying power, but it's a risky tactic since you can lose more money than you put into your account. On the other hand, margin can help you avoid fund settlement restrictions. Keep track of how much real equity you hold in your account to avoid overextending your account with margin, and remember the Pattern Day Trader rules to avoid any account restrictions. As a beginner penny stock trader, you should stick with your own cash.
