OTC stocks

Sometimes on this blog, I talk about OTC stocks. I know that this isn't recommended. I know that there are a lot of scams and market manipulation. I know that many lack lengthy operating histories or significant share liquidity. The bid-ask spread can be a chasm. Still, there are also some really good, fast-growing under followed companies here. For instance, there are many legitimate, money-making Chinese stocks that are dipping their toes in a Western listing via the Over the Counter Bulletin Board and the Pink Sheets.

It is important to draw a distinction between the OTCBB and the Pink Sheets. The Bulletin Board generally has two types of companies listed on it.
Sometimes a stock has been delisted from a major exchange and is doing time down there until it gets its act together. In this way, the OTCBB can be a way station for companies on the way up or the way down. Other times, the a company just can't meet the strenuous listing requirements of the Big Board or NASDAQ. All companies on the OTCBB are still required to file all SEC and industry regulatory filings. Other than that, there are no listing requirements.

The Pink Sheets also have no minimum listing requirements. However, unlike the OTCBB, they do not require the filings with the SEC and other regulatory bodies. This can make next to impossible to find reliable information about companies listed here. However, there are some legitimate enterprises on the Pink Sheets. There are quite a few ADRs. For instance, BMW Group and Volkswagen both trade on the pink sheets. In recent years, new management has introduced a tiered system that it hopes will help distinguish the good from the bad.

Let me offer 5 guidelines that will help you when investing and trading these companies.

1. Do your homework. This is not as obvious a point as it seems. Do not follow tips you find on stock promotion websites. Look for SEC filings. Call their investor relations department. Google them. If you can't find reliable information, don't invest a single penny.

2. Don't trade stocks with average daily volumes of under 50,000 shares. Liquidity is an important factor, especially if you're trading. You want to be able to get in and out of a stock, especially out.

3. Look for stocks with narrower ask-bid spreads. This will be a big part of your costs. The bigger the spread, the more you'll pay.

4. Know why you're placing the order. Is this an investment or a trade? Do you have a price target? If it is a trade, don't get greedy and over stay your welcome. Get in, get out, and move on.

5. Don't forget about asset allocation. Don't go for broke trying to make a killing. Never risk more than 5% of your portfolio on a penny stock position. Speculation doesn't have to mean pushing all your chips into the middle of the table. You want to be able to walk away, whether it pays off or not.