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Over-the-Counter
Bulletin Board stocks, or OTCBB's (also known as penny stocks
or pink sheets), seem to generate black-and-white responses
from people. Young, frisky, devil-may-care individuals (no
matter the age) may view OTCBB's as a wise investment, albeit
a high-risk venture. More conservative folks may perceive
OTCBB stock purchases as foolish and a waste of time and money.
Although a grey area does exist somewhere between these two
viewpoints, it's usually slim. How does an investor determine
whether OTCBB stocks are good medicine for his or her portfolio?
First, understand how the OTCBB market operates. Secondly,
determine other variables about yourself to decide whether
you can stand the financial risk.
The OTCBB
market is volatile because the shares in this arena belong
to companies that are start-ups, businesses that have remained
too small for larger market exchanges, or other entities that
strive to reach a certain pinnacle of economic success (including
those with bad credit). While these stocks aren't listed or
available on officially recognized stock exchanges, they are
traded in direct negotiation between buyers and sellers or
purchased online or through brokers for a fee. Similar to
over-the-counter drugs, these stocks can be purchased without
a doctor's - or, in this case, without a financial advisor's
- prescription.
However,
OTCBB stocks are more difficult to purchase then over-the-counter
drugs, because many brokers don't want to be associated with
the volatility or they find OTCBB pursuits far too risky and
financially unrewarding for the amount of time involved in
research and timing. You cannot, for instance, purchase OTCBB
stocks through BUYandHOLD. If you are bound and determined
to seek financial adventures, however, I know one person who
was well-suited to purchase OTCBB stocks, and I'll use him
as an example to explain the type of investor who might profit
from this venture.
This man
is in his mid-forties, he's settled with a partner, and they
don't have children and don't intend to cultivate a family.
He and his partner have owned their own separate businesses
for almost twenty years. He began his portfolio about ten
years ago, and over the years he's increased his input and
has seldom sold. In other words, he's a long-term, buy-and-hold
investor. His portfolio is diversified, with ten different
stocks in five different sectors, and he tends to purchase
stocks that pay dividends. Additionally, both the investor
and his partner hold real estate, savings accounts, life and
health insurance, and IRAs. Neither individual is in debt.
Over two
years ago this investor decided to open another portfolio
with minor investments in OTCBB stocks. However, he didn't
plan to "play the market" so much as he wanted to become part
of some start-up endeavors. The research for this task took
months for this investor to conduct. This job was difficult
because many of these small companies don't have time for
PR (public relations), they don't want PR, or they cannot
afford the time or money for PR or advertisements. He found
these companies through articles written by journalists who
focused on his interests.
This investor
found five companies that fit his criteria: they had at least
one product that was situated to sell; they were listed on
the OTCBB market for at least six months or more; they all
sold for less than $1.00 per share; they were written up in
at least two different publications; and, finally, these companies
had owners and managers who had been with this company since
the inception of the given venture. He purchased the stocks
(100 shares each) and then let them sit for two years, because
he knew that:
- OTCBB
stocks don't carry the volume that "normal" stocks carry,
so sales are few and far between.
- Because
of low volume the asking price for a sale or purchase is
seldom met when the buyer or seller wants it to be met.
In other
words, volume is everything in the OTCBB market. Buyers must
find sellers and sellers must find buyers, and low volume
is what makes this connection risky. So, unless the OTCBB
buyer or seller is willing to take a loss, break even, or
find little profit for such a time-consuming project, the
best option is to develop a buy-and-hold mentality. Further,
this long-term frame of mind needs to be bolstered by self-confidence
AND confidence in the company and its product or service.
What happened
to this investor's OTCBB portfolio? Out of five investments,
two declared bankruptcy, one stayed level, and two increased
in value over five times. Out of the last two, one business
is poised to be purchased by a major corporation and the other
company is set to emerge on an officially recognized stock
exchange. This investor plans to continue to hold onto the
three remaining investments to see how they fare over the
next two years.
Please
believe that I couldn't make up a story this good unless it
was based on reality. Take note of the investor's age, his
real-life financial situation, and the amount of time it took
for him to research his investments and realize a profit.
Granted, although the risk was high, his return was high,
also. However, the return is, in his terms, "untouchable."
In other words, he still doesn't consider his investment as
liquid because the volume remains too low; however, he doesn't
need this money for emergencies or other problems that many
folks who raise families face on a day-to-day basis.
So, if
you believe that OTCBB stocks are just the medicine that your
portfolio needs, think hard about how the OTCBB market operates
(and I just touched on a few problems here), and about how
much risk you can tolerate given your present financial situation.
If, like the above investor, you find that you have no debt,
lots of insurance, other solid investments, some cash on hand
that you were going to spend at the casino anyway, a lot of
time to spare on research, and a willingness to hold on until
that stock sees a possible future, then more power to you!
Until
Next Week,
Linda Goin
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