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OTC Markets: Penny Stocks in the Wild West. (Post 23/45)
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Welcome to post 23.
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In the last post, we discovered one of the biggest winners and the silent killer. Warrants. We explored the concept of lenders exercising cheap shares to liquidate them into retail buyers, letting your momentum get ensnared in the invisible ceiling.
On to a detour now. We are moving now out of the slightly "regulated" NASDAQ and NYSE. We're officially in the real Wild West of penny stocks.
The OTC Markets. Over-The-Counter. The Pink Sheets.
Welcome to the jungle, if you're used to the normal penny stocks you're in for a rough time.
Following are some facts about OTC markets. Here is where companies reside when they're too small, too short on funds, or too underwhelming to qualify for listing on major exchanges. This isn't a penny auction. You are exchanging "sub pennies". Tickers priced at $0.0001. A small fraction, a small part of a penny.
It's an attractive offer, isn't it? If it goes to just 1 cent I am a millionaire!
They do just that, and they trap you.
The worst thing about OTC penny stocks is the lack of transparency. So, remember those SEC filings which we discussed a few posts ago - the 8-Ks and S-3s? Yeah, good luck looking for those here. There are many companies that trade over the counter that do not report financials. They are "dark" companies. One of those ghost towns, one of those fascinating ticker, and one of those rented office places.
Another thing is the liquidity trap. The bid-ask spread for OTC stocks can be extremely tough.
The sell price could be $0.03 and the buy price could be $0.05. You've just bought that stock and by a mere margin, you have just lost 40% of your investment. But what if the hype goes out? The bid simply goes away completely. You may have a million shares of an OTC penny stock, and have the urge to sell your shares, but there is not a single human being on earth who wants to buy your shares from you. Your cash is simply locked up. Gone.
It's the place of spammy promotions, HUGE chatroom pumps and pure garbage firms.
Is it profitable to trade OTCs? Yes. If momentum is on the side of a pink sheet runner, they can go thousands of percent. It's like a casino, however. Don't invest in an OTC stock. Buy, scalp, and sell before it's too late.
Meet up with the following post as such.
In this post we discussed about the perilous Over The Counter (OTC) and pink sheet markets. We spoke about the enormous dangers of trading subpenny stocks without any regulation whatsoever, with terrible bid/ask spreads, no financial transparency and absolutely no liquidity to get out of such trades.