Gap Up - What Does It Do to My Penny Stock Portfolio?

A gap up is the term given when a stock opens at a significantly higher price than the previous close due to a lot of off hours investment activity. You can put in an order to buy a stock any time you want, for example, midnight on Tuesday or 3 pm on a Sunday. The order is essentially queued and will attempt to execute when the markets next open. Orders are usually processed in the order in which they are received.

So, for example, let's say that you want to buy 1,000 shares of stock ABCD. Your order is queued and executed at the prevailing market price when the markets open AFTER the orders that were placed before yours are executed. The stock quote you receive doesn't change until the market opens. So if you want invest in 1,000 shares @ $1 per share, you would expect to pay $1,000 (not including the trade execution cost).

But what if another investor already placed their order in front of you and bid $1.05? The price per share would increase as their trade would execute before yours. When its your turn, you would essentially buy the stock at $1.05 instead of a $1, so you would spend $1050, again not including broker costs.

As you can see, if you were holding the stock before the market opens, the price change helped you. The markets opened and the stock was higher essentially BEFORE any current day trading took place. However, if you wanted to get in and invest in the stock, it is now harder to do so and still make your profit target because the costs and prices have already changed.

This effect is magnified with low cost penny stocks. Consider this example. You want to invest $1000 in a stock valued at $0.02. As the market opens you put in an order for 50,000 shares. You have a profit target of 250% ($.05 pps), making you a quick $1500 when you sell all your shares. However, there is a gap up at the opening bell, and the price moves to $0.06 before your trade executes. When your order comes up, you would buy 50000 shares at $0.06, meaning you would need to invest $3000 instead of 1000 for the same amount of shares.

Many brokers require limit orders for your protection, meaning the trade will not execute unless the price per share is at a certain level. In our above example, as long as you didn't put the limit price at 6 cents or more, the trade would not execute. This is generally a good thing.

However, you'll probably still be disappointed because you lost out on a good opportunity. The key to avoiding gap ups is to watch out for a promoter's early picks. Usually, most stock promoters tend to release their stock picks a little before or at the opening bell at 9:30 am Eastern US time. When they release earlier, such as the night before, expect a gap up to occur because investors will most likely be lining up to get the best possible deal on a stock that will have price fluctuations the following trading session.

Gap ups further complicate an already risky and complicated penny stock investment process. That said, you can succeed in the penny stock market, even with gap ups, by further understanding how they work and when to invest - if at all. Sometimes the best move you can make is not investing at all.

For more info consult with our experts at Paradigm Capital Management a small cap company. With a long history of small cap investing and micro cap funds, Paradigm employs a disciplined, bottom-up approach with an emphasis on fundamental analysis and extensive management contact.

We have the experts when it comes to Small Cap Investment and we can definitely assist you with your financial goal, contact us at (518) 431-3500

OR visit us here: http://paradigmcapital.com/