Surviving the Over-the-Counter Stock Market
Over-the-counter stocks, being small and often not well-followed by many analysts, are especially susceptible to rumors and false reports. Stockbrokers and underwriters flourish on heavy trading and are ususally themselves the source of misleading reports. Basic wisdom applies here: Whenever a company sounds too good to be true - watch out - because it probably is!
Rule of thumb: If you don't know why you own a stock - or why you're buying - then you're in someone else's hands. This makes you more vulnerable to the whims of the market.
Over-the-counter stocks, particularly new issues, are usually short-term plays. And one should never buy any OTC stock without first having a sell target in mind.
If the selling price is reached, even within a week of buying, stick to your predetermined sell decision - unless there is some major extenuating factor you hadn't considered before.
About 80% of all the new issues will be selling below their issue price within 18 months time. Reason: Most new issues are overpriced in relation to existing companies; but they themselves are all destined to become just another existing company within a year of being issued..
Whenever you are evaluating a new issue, find out who are the people involved. If the underwriter is, or has been, the target of the Securities and Exchange Commission's investigations, this is often mentioned in the prospectus. The SEC prints a manual of all past violators. So avoid underwriters that have had a lot of SEC problems. The strong companies rarely use them when going public.
Check out the auditors of a new-issue company. They will be named in the prospectus. If the auditor is not well-known or is itself in trouble with the SEC, question the numbers in the financial reports.
Another danger in over-the-counter stocks is a key market maker who mixes buy and sell orders in amongst its own brokerage customers so that the market price is artificial. If such a broker collapses, so too will its main stocks. This illustrates the danger of buying a stock dependent on only a single market maker. To avoid such a problem, invest in stocks quoted on NASDAQ where, by definition, there are at least two strong market makers, and hopefully a lot more.
Try to spot companies just before they decide to go onto NASDAQ. When they do, their price inevitably rises because of the increased attention. Very often the managements will simply tell you if they have NASDAQ plans or not. One very good tip-off: If they've just hired a new financial manager, it's often a sign of an imminent move to NASDAQ.
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Rule of thumb: If you don't know why you own a stock - or why you're buying - then you're in someone else's hands. This makes you more vulnerable to the whims of the market.
Over-the-counter stocks, particularly new issues, are usually short-term plays. And one should never buy any OTC stock without first having a sell target in mind.
If the selling price is reached, even within a week of buying, stick to your predetermined sell decision - unless there is some major extenuating factor you hadn't considered before.
About 80% of all the new issues will be selling below their issue price within 18 months time. Reason: Most new issues are overpriced in relation to existing companies; but they themselves are all destined to become just another existing company within a year of being issued..
Whenever you are evaluating a new issue, find out who are the people involved. If the underwriter is, or has been, the target of the Securities and Exchange Commission's investigations, this is often mentioned in the prospectus. The SEC prints a manual of all past violators. So avoid underwriters that have had a lot of SEC problems. The strong companies rarely use them when going public.
Check out the auditors of a new-issue company. They will be named in the prospectus. If the auditor is not well-known or is itself in trouble with the SEC, question the numbers in the financial reports.
Another danger in over-the-counter stocks is a key market maker who mixes buy and sell orders in amongst its own brokerage customers so that the market price is artificial. If such a broker collapses, so too will its main stocks. This illustrates the danger of buying a stock dependent on only a single market maker. To avoid such a problem, invest in stocks quoted on NASDAQ where, by definition, there are at least two strong market makers, and hopefully a lot more.
Try to spot companies just before they decide to go onto NASDAQ. When they do, their price inevitably rises because of the increased attention. Very often the managements will simply tell you if they have NASDAQ plans or not. One very good tip-off: If they've just hired a new financial manager, it's often a sign of an imminent move to NASDAQ.
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posted by Bob Moser at
3:27 PM
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