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How To Evaluate Over The Counter Stocks

By Jason Markum

Investing in the stock market is a lot of fun but it also takes a lot of skill. Investing in the over-the-counter stock market is another beast entirely! Over-the-counter stocks are generally companies that are much much smaller than a regular publicly traded company on the NASDAQ or the New York Stock Exchange. These companies are very thinly traded, meaning you may not be able to buy or sell the quantity you want on any given day.

Because of this, large sways in prices, both up and down can be completely normal and if you aren’t willing or able to handle the psychological effect this may have on you, you’ve got to seriously reconsider investing in this market. But if you think this is the place for you, I’ve got a few tips to help you evaluate over-the-counter stocks and I’m going to share them with you in this article today.

First of all, the growth potential of the company is the most important consideration you will ever have, single-handedly. The earnings increases for the company should be at least 10% a year on average for the past six years or else you should stay away from the issue.

Next look at the cash, investments, and accounts receivable as well as the materials and inventories for the company. These things should normally be at least twice the size of the liabilities that are due within the next year for the company. This is because smaller companies need a larger cushion to weather all storms.

Next take a look at working capital per share. For over-the-counter companies the working capital per share should be larger than the market value of the stock. For instance, a $12 stock should be backed by a good solid $14 per share in working capital; at least.

Next, the company should be owned by a least 10 institutional investors as reported in the S&P Stock guide. This may be hard for many OTC stocks but it is important nonetheless.

Next look at the balance sheet for the company. It shouldn’t show any deferred operating expenses at all.

Next look at who also owns the stock. You want to look for public ownership that is between 500,000 and 1 million shares of stock. A good indicator is that no more than 10% of the company is controlled by a single individual or institution.

Next look at recent dividends or at recent stock splits. What happened after the dividends were issued? Did the price of the stock continued to increase or did it drop? Increase suggests that the company is financially solid and it’s investors feel strongly about it. A decrease suggests that insiders are cashing out and running away… which is a horrible sign and a clear indicator to stay away.

Finding a good over-the-counter stock can be a lot of work but at the same time it can be incredibly rewarding because all it takes is a few of these gems to be uncovered in order to make you a lot of money very quickly!

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