OTC stocks. There’s not much else in the market that compares to the reaction you usually receive at the mere mention of a Pink Sheet company. OTC stocks can be astronomical money makers, but they can also destroy portfolios. At penny stock classroom we’re constantly working to cut through the hype and give you an idea of what to expect out of each potential play. One of our best tips regarding OTC stocks is that you trade the stock, you do not invest in it. Keep that mindset as we go further in detail.
The basic premise of an OTC stock or a Pink Sheet stock is non-reporting. If you are the type of investor that expects audited financials and compliant SEC filings, you may want to stick to the big board or Pink Sheet’s rich cousin – the OTCBB.
Most companies listed as an OTC stock are usually one or a combination of a few things: closely held, small, thinly traded, or bankrupt. Don’t let that necessarily scare you off! There is money to be made in anything. I remember WAMUQ being a fun trade for a long time (I will harp on the trading premise, these things are not buy-and-hold for your kid’s college fund).
Trading in OTC shares is a high risk/high reward venture. A lot of stock promotions happen in the arena, with a sizeable number of that promotion being spam campaigns fueled by faxes, mailers, etc. What investors in this arena want to watch for is high volume. Do not jump into something that has zero volume unless you are trying to play a rumor and willing to risk it. For a better idea on what you need to know about trading hop over to the learn penny stocks section.
Earlier this year, the Pink Sheets exchange unveiled a new tier system to try to clean up its image and thwart some of the fraud happening within the market.
Pink Sheet Tiers
OTCQX – This is the most trusted tier of the OTC and OTCBB markets. Companies in this tier are investor focused and offer traders transparent trading, up to date information, and easy access with broker-dealers.
OTCQB - Companies in the OTCQB tier are registered and are up to date with their reporting obligations to the SEC or to a U.S banking or insurance regulator. OTCQB stocks are quoted on the Pink OTC’s quotation and some may also be found on FINRA’s OTCBB.
Pink Sheets (OTC) – These companies make their filings publicly available. While there is transparency in this tier it doesn’t necessarily mean these are good companies to trade in. Shell and development companies are included in this category and these companies usually have little or no operations. There are even companies with no audited financials. These companies should be considered highly speculative by investors.
Pink Sheets Limited Information – This tier is designed for companies that have problems reporting financial information or are in bankruptcy. Companies who may not be in trouble but choose not to meet the Pink Sheets’ Guidelines for Providing Adequate Current Information are also included in this category.
Pink Sheets No Information – Companies in this tier are not able or are unwilling to disclose any information to public markets. Examples of companies in this tier are companies that have ended operations and companies with questionable management and disclosure practices. These companies should be treated with suspicion and as such trading them is highly risky.
Caveat Emptor – Securities in this category are extremely dangerous to trade. There are public interest concerns with these companies. Usually this means there may be spam campaigns, questionable stock promotion, or investigations of fraudulent activity by the company or insiders.
These are the different market tiers of the OTC and OTCBB market tiers. As traders always trade in companies that are extremely transparent with their information. If you think something is fishy with a certain stock then don’t trade it.
Overall, trading in the OTC or Pink Sheet market is extremely high risk / high reward. If you want to trade this type of scenario you need to make sure you do your own research. Chatrooms, forums, blogs etc. are good for ideas, but like anything on the Internet, take it with a grain of salt. Don’t ever invest more than you are willing to lose and use a good broker for fast fills.