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How To Buy And Sell Stocks Below Market Prices

Jun 6, 2008
Stock trading is like thousands of transactions that take place everyday in other venues just like the stock market with one common denominator, a buyer and a seller. Stock trading is not unlike the retail world, where supply and demand reflect the price of goods and services just like supply and demand determines the price of individual equities. Although there is a similarity with the example of supply and demand, a stock may be bought or sold at different prices. Retail goods are usually sold for a static price, stocks however can be purchased at different prices with these prices reflected in the offer or ask price and the bid price.

For example, every stock has a current bid and offer. The bid price is reflected on the left side of the box and is usually what sellers can sell the stock for at the current market price. A seller can initiate a trade to sell their stock at the current bid price with the sale almost always taking place immediately once the trade is initiated. A buyer can also use the bid side to buy stock at a lower price than what is currently being displayed on the offer or right side of the box. If a trader does not want to pay the offer price that buyers are willing to sell their stock for, he can place a stock trade and bid for the stock on the left side of the stock at a lower price than what is being offered on the ask or offer side.
Usually if the stock is liquid, a seller will eventually sell to the bidder at the price the trader has placed on the bid side to buy the stock.

The same works for the right side of the box, the offer or ask price. The offer side is where buyers can purchase the stock at the current market price and are paying the top price for the stock at this given time during the trading day. However, if a seller wishes to sell his stock at a higher price than what is currently showing on the bid side of the stock, the trader can initiate an order and offer his stock on the ask or offer side and wait for buyers to pay the current market or best offered price for the equity. With patience, traders can buy and sell stocks for lower than the current market price making more money than he would otherwise receive at the prevailing prices.

It should be noted that stock prices do fluctuate throughout the trading day as the ebb and flow of supply and demand dictate in the financial markets. Liquidity is very important in order to purchase and sell stocks below the prevailing market price. Stocks that have very little liquidity do not lend themselves to this practice since it is difficult for buyers and sellers to name their own price in illiquid stocks. The practice of buying and selling below the current market price is usually the realm of the scalper who takes small profits in many transactions throughout the trading day and the day trader who may buy and sell just a few times during the day. However, this trading strategy is not only for these two types of traders, the swing trader and long term investor can also profit from buying and selling below the current bid and offer price if patience is exercised.
About the Author
Phillip Hatley is a full time trader with eight years of experience in futures, stocks and options trading. For more information about trading and for investing ideas, please visit his penny stocks blog.
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