New investors, take note.
But first: Malcolm, good post!
For you investors new to penny stocks, you may not be aware that
the market makers (MM's) do not have a fundamental obligation to match sellers with buyers. MM's set their own bid and ask prices at their discretion. When an investor buys a penny stock, he buys from an MM. When he sells a penny stock, he sells to an MM. The MM may choose to accumulate shares or sell shares he already owns. Thus, even though an investor might be willing to sell you shares below the ask price, he has to go through an MM who will not pass on the lower price. Example: If the bid is $1, the ask is $2, but an investor would be willing to sell to you for $1.50, he still can only sell to the MM for $1, and you can only buy from the MM for $2.
From this arises the frustrating situation of watching the ask rise dramatically upon good news from EUTO, while the bid languishes. The large spread, while frustrating, is legal (in my opinion). Thus, I don't think TAKERA_at_SI has a case against the MM's. Also, I don't think EUTO carries any weight with the MM's either. How could they?
The only thing that works for our (the investor's) benefit is that there are several MM's who compete for our business. The MM with the highest bid is the one who will fill you sell order; the MM with the lowest ask is the one that will fill your buy order. So I say, the more MM's, the merrier.
MM's make their money either on volume of sales times the spread, or by accumulating shares when the price is low, and reselling them when the price is much higher. MM's can be true daytraders, playing on the minute-by-minute momentum. (There is also an illegal-shorting theory as a money-making mechanism, but I won't go into that.)
In conclusion, buying and selling penny stocks has additional risks that at first do not meet the eye.
The above explanations are my understanding and observations of the way things work. I'm not a financial advisor, so the explanations may not be 100% accurate. Any comments and clarifications are welcome.
- Fred
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