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My questions are about the "bid" and "ask" prices. Is the bid what you purchase or sell a stock for? Same goes for the ask. Also, when they talk about the size of a market, what do they mean? -- J.P. Gregg Greenberg: By definition, the "bid" is the price a buyer is willing to pay for a stock, while the "ask" is the price for which a seller is willing to sell. But an even easier way to think about the two prices, as well as the so-called "bid-ask spread," is in terms of supply and demand. Because when you get right down to it, those are the two forces that ultimately determine the price of a stock trading on an exchange. Consider the case of fictional Nasdaq-traded stock WXYZ. In this example, let's say the bid price for WXYZ is $20 and the ask price is $20.50. In plain English, this means that the highest price a buyer is willing to pay for WXYZ is $20. On the other side, the lowest price someone is willing to sell this stock is $20.50. The difference between the two sides is called the spread, which in this case is 50 cents. With a 50-cent spread separating the highest bidder from the lowest seller, what will it take to bring the two sides together to create a sale? The answer: Pressure in the form of supply and demand. And to find out how much pressure, you need to check out the "size" of the market. Aside from just listing the bid and ask prices of a stock, an exchange also will print the size of the market. WXYZ, for instance, may have a bid size of "$20 x 200," which means that there is demand to buy 20,000 WXYZ shares if the price drops to $20. Jumping to the other side, let's say WXYZ has an ask size of "$20.50 x 50" -- which means that there are only 5,000 shares for sale at $20.50.
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) and Nortel ( NT) -- 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.
I am trying to get started on investing. I am currently reading Jim Cramer's new book. I'm not that far into the book yet though. Are there any other books that you would suggest that would help break down how it all works and define some terminology? As I said, I am just getting started and I am completely clueless about it all. -- S.D. Have you ever tried to teach a beginner the rules of baseball or football? It's quite frustrating isn't it? You sit there for hours and hours trying to explain what to you is second nature. Finally, after much frustration, you realize that he would learn so much faster by just going outside and playing the darn game. Well, it's the same way for investing. It's an arena where you learn by experience. And like sports, you may lose in the beginning, but you need to play to truly understand how the game works. That's why I recommend taking the money you would otherwise spend on a shelf-full of "Investing for Idiots" books and use that money to buy a stock. Before anybody accuses me of encouraging readers to gamble away their hard-earned money without knowing the first thing about Wall Street, just hear me out. There are dozens, maybe hundreds, of books out there specifically written for beginning investors like yourself. There are also Web sites like TheStreet.com that have