Broker Dealer 

Principal/Agency

In most securities transactions, your broker-dealer acts as your agent, arranging a transaction directly between you and a third party. In compensation for arranging that trade, you pay your broker-dealer a commission. In some instances, the broker-dealer has the security you seek to purchase in inventory, or wants the security you wish to sell. The broker-dealer may trade with you on its own behalf, as a principal in the transaction. When the broker-dealer acts as a principal, and not as an agent, the trade confirmation should say that on its face. The broker-dealer is not paid a commission in principal trades, but makes its money on the spread, and by buying and selling at advantageous times, the same as any other investor. A sizeable portion of penny stock trades are principal transactions, and an investor should be alert to the potential conflicts of such transactions.

Bid/Ask

Stocks do not each have a single price at which they are bought and sold, but a number of different prices. The first difference is between the bid price and the ask price. The bid price is how much someone is willing to pay for the security, or the price at which you could sell your shares. The ask price is how much someone will sell their securities for, or how much you will have to pay. The difference between the prices is the spread. We strongly recommend against selling Penny Stocks at market. That is, we would suggest placing a limit order. For that matter, we strongly suggest placing limit orders on all trades regardless of the exchange. Limit orders at the prevailing market price have proven very effective in obtaining optimal execution.