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How To Survive The Over The Counter Stock Market

By Jason Markum

I don’t have to tell you that when it comes to stock market investing it’s a dog eat dog world! Make one small mistake and you can see years and years of careful savings and investing evaporate in the blink of an eye. But the over-the-counter stock market, that’s a whole different beast completely! The OTC market is the wild wild west where just about anything goes. If the regular stock market is dangerous, then the OTC market is life threateningly dangerous…

Why is that? Because the OTC market deals with small stocks that are very thinly traded. Even without shenanigans, a stock may just drop out of the sky because the company is simply not very good. But under the worst of circumstances there are all kinds of crazy things that can go on including manipulation and insider trading because this market isn’t as tightly regulated as the major stock markets are.

Still, there are some things that you can do to help insulate yourself from most of the danger and that’s what I’m going to talk about in this article today.

The first rule is to only invest when you have a clear idea of why you want to invest. Many times we buy OTC stock simply because it’s so cheap and we stand to make a killing if it increases even a little. That is no reason to buy a stock. You should only buy stock for sound fundamental reasons, i.e. the company is a good company that has good prospects for future growth. Without that future growth, there’s no reason to invest ever.

The next rule is to realize that over-the-counter stocks are almost always short-term plays. This means that you should never buy one without a clear selling target in mind. The stocks tend to fluctuate wildly in prices and in no time at all your sell target may be reached, sometimes quicker than you expected. If this happens, pull the trigger and sell immediately even if you’re tempted to ride the wave a little longer. What goes up quickly can drop down just as quickly in the OTC market!

Next, realize that up to 85% of all new issues will usually be selling below their issue price within the first year and a half because most of these new stocks are overpriced when they are first issued and after the first year or so the buzz has worn off and the stock drops.

Next, pay special attention to the auditors of a new issue. You can find out who the auditors are by reading the prospectus carefully. If you’ve never heard of the auditor, that’s a red flag and you should maybe consider running away. Auditors are all about reputation. Without a reputation and auditor’s numbers are just that… numbers, they may not mean anything!

Finally, do some research on the underwriters. If the brokerage firm that is underwriting the OTC issue has been in trouble in the past with the SEC, this may be a clear indicator that your OTC stock is not as solid as it may look. Good companies use good auditors and good brokers for their underwriting. Less solid companies take what they can get.

Investing in OTC companies can be a lot of fun, just as I’m sure living in the Wild Wild West way back when was also a lot of fun. If you think you’ve got the temperament then I wish you all the luck in the world, not that you’ll need it!

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