As fellow Californians, we know life here isn’t cheap. So, when you have spare change jingling around your pocket, it’s natural to want to make the most of it.
And so, many of us have taken a long look at penny stocks and OTC markets. However, while some have enjoyed great success in this arena, the risks are many. Because of this, you need to do your research before dipping your toe in this pool.
And that’s where this article comes in – below, we’ll give you background on penny stocks, OTC trading, plus a few tips on how prosper while staying safe.
What are Penny Stocks, and Why Do Californians Love Them?
According to the SEC, penny stocks trade for less than $5 per share. Now, on some OTC exchanges, hot penny stocks can soar well above that level. But so long as they don’t meet exchange listing requirements, most still refer to these equities as penny stocks.
Now, it takes less than a minute to understand why penny stocks are so popular among Californians: they are dirt cheap. On financial cable networks, stocks like AAPL, TSLA, or even GME are aggressive promoted.
But with prices of hundreds or even thousands of dollars per share, these equities are out of reach for most. However, penny stocks aren’t. Most are worth less than $1, which makes it easy to load up on mass orders of shares.
Which Penny Stocks Have Been Successful in California?
America is a powerful, entrepreneurial nation. And within it, California is one of its greatest success stories. As such, there are numerousvibrant penny stocks that call the Golden State home.
For instance, Demand Brands (OTCMKTS: DMAN) is a standout. Based in Los Angeles, this holding company owns and operates various popular brands like Lucky Chief, Weedies Edibles, and Infusional.
If you do further research, you’ll find numerous other penny stocks like Demand Brands. However,we want to correct one misnomer, though: despite what urban legends say, Apple (NYSE: APPL) was never a penny stock, despite trading below $8 in the late 1990s.
What are OTC Markets?
Penny stocks don’t trade on the NYSE or NASDAQ. Instead, they sell on a platform known as the OTC markets. OTC stands for “over the counter,” and it’s here where you’ll find these unlisted securities.
Three exchanges comprise the OTC markets:
This exchange is the top-tier of the OTC markets. Here, companies are subject to the most stringent regulations on this platform. For example, to be listed on the OTCQX, firms must meet financial reporting requirements on par with top exchanges, be sponsored by a third-party investment bank, and undergo an annual verification process.
This exchange is for firms that can meet SEC reporting requirements. These companies could list on mainstream exchanges, but often, they lack the funds to pay listing fees, or they are foreign companies. So if you’re looking to invest in a foreign penny stock, the OTCQB is probably your best bet.
The OTC Pink Sheets
On the OTC Pink Sheets exchange, you’ll find firms who choose not to file with the SEC. So unless you are a seasoned trader, avoid.
The Risks Associated with Penny Stocks
As we mentioned in the intro, penny stocks come with a lot of risks. But what exactly makes these equities so hazardous?
First and most importantly, these publicly-listed firms don’t follow the same rules as those on major exchanges. This point is especially true for companies on OTC Pink, so don’t go there if you’re new to penny stock investing.
Second, even if a company is legitimate, there’s usually a reason their stock price is so low. Often, it’s because that firm isn’t doing well – if they were previously on a major exchange and had to delist, beware.
Lastly, most penny stocks lack liquidity. The reason lies with the structure of OTC markets – you see, on significant exchanges, investment banks are the market makers. And since they can bankroll large transactions easily, these trades go through almost immediately.
But on the OTC markets, dealers are the market makers. Because of this, it can be difficult to fund large trades within a reasonable period. So, when your penny stock plunges, you could experience great difficulty exiting your position. As a result, what would have been a 20% loss could turn into a 50% loss – or greater.
The Benefits of Investing in Penny Stocks
You might be genuinely terrified of the OTC markets, given what we said in the last section. However, while real risks exist for penny stock traders, there are significant rewards.
Firstly, the hefty price swings referenced in the last section can also work in your favor. If you have a trading bankroll that can withstand variance, chasing massive OTC returns may be worth the risks.
Furthermore, because penny stocks trade on OTC markets, Wall Street analysts and the financial media often ignore them. Think about it: when was the last time you heard Jim Cramer pump a penny stock? By finding an unappreciated gem and getting in on the ground floor, you could earn massive profits.
How to Research Penny Stocks
By now, you should realize that penny stocks carry a much higher risk profile than mainstream equities. But in general, the fundamentals of penny stock research are the same as conventional stock research.
Now, if you’re not familiar with this process, it involves looking at a company’s financial statements, management team, and their industry’s competitive landscape. After that, dig into current news surrounding your target.
While the mainstream financial media lags in this regard, websites like insiderfinancial.com have begun to fill this gap nicely. But don’t stop there – sometimes, OTC-listed penny stocks can lack the data needed for proper fundamental analysis.
Because of this, having a solid understanding of technical analysis is a must. Here’s why: unlike fundamental analysis, technical analysis studies an equities’ price and volume patterns. So, you can determine whether a prospective stock is overvalued or undervalued with this information.
Finally, before you start executing buy orders, choose your broker wisely. By finding one that offers low commissions, great tools/education resources, and top-tier customer service, you’ll have the foundation needed to perform optimally.
If You Trade Penny Stocks, Have Fun – But Be Safe
Have a high-risk tolerance? If so, penny stock investing can be a fun way to practice your trading skills. However, if you have limited funds, you should think long and hard before wading into these waters.
If you’re led by a hunger for out-sized returns, you could fall victim to a pump-and-dump scheme. So, if you choose to proceed, never invest money you can’t afford to lose. This way, penny stock investing will remain a game, and not a life-or-death struggle for survival.