Ask TheStreet: Bid Bewilderment

With this kind of disparity, the price should move upward as more buyers say to themselves, "Wow, there is a lot of demand for this stock at $20 and not much supply even at $20.50. So I'd better raise my bid closer to the asking price."

And that's how the gap between buyers and sellers, or supply and demand, is bridged and the price moves to the next level. Where it goes from there ... only the market knows.

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I'm a small investor just starting out. I want to know if it is better to buy a lot of a small dollar stock or a little of a high dollar stock. Thank you for your time. -- F.B.

Don't be fooled by the appeal of low-priced stocks. They may seem wonderful because you can buy a lot of shares in round lots of 100, thereby increasing your leverage. But leverage works both ways, and if you are a small investor it could wipe you out before you get started.

Here's what I mean about leverage. Let's say you own a thousand shares of a $5 stock for a total of $5,000. If the stock goes up to $10 on good news, or 100%, that means you now own $10,000 worth of stock.

Now you may be thinking to yourself, "Hey, that's pretty good! The stock only went up a measly $5 and I doubled my money. If I bought 100 shares of a $50 stock for that same $5,000, then it would have to go up a full 50 points to $100 a share to get me to $10,000."

In other words, it's a whole lot harder for a stock to move up $50 than $5, so buying the smaller stock is the smarter move, right?

Wrong. At the end of the trading day, large and small stocks alike are judged on a percentage basis, not on their absolute gains or losses. For example, if you watch the day-to-day closing prices of heavily traded low-priced stocks Lucent (LU Quote) and Nortel (NT Quote) -- both are trading around $3 a share -- you will see that they rarely move more than a penny or two in price. If they move a dime, or 10 cents, that's a huge 3% move.

Under those conditions, when you are talking pennies at a time, a $5 move may as well be $50.