Over The Counter Bulletin Board stocks (OTCBB) and the Pink Sheets are the two types of penny stocks you will encounter. The main difference between the two is that OTCBB stocks are required to file with the SEC and the pink sheet stocks are not. Some traders refuse to trade pink sheets because of this, those traders are missing out on some great opportunities. Even Warren Buffet has been known to look for undervalued companies in these markets. Beware, trading in the OTCBB and Pink Sheets is not for everyone. Often the stocks are illiquid and have a large spread between bid and ask. There are also a lot of companies that are completely worthless and will try and masquerade as great companies while diluting their shares. Another worry about these stocks is the fraud involved or “pump and dump” schemes where traders or company insiders have their stock “talked up” on bulletin boards or in chat rooms. The posters make unrealistic statements about where the company and the price per share are going, while selling you their shares. The price per share then plummets. You can avoid most of these problems with due diligence on your part. Take the time to read filings, call the company and investigate thoroughly. This investigation should take place with OTCBB stocks and Pink Sheets. Do not expect to find everything you need to know in the filings.
After you find a stock that you wish to purchase, you pull up the price and find that there is a 30% difference between the “bid” and “ask” price. The bid being what a trader is willing to buy a stock for and the ask what a trader will sell the stock for. Finding spreads of 30% or more is very common in these markets. If the stock is thinly traded with a big spread, you will want to buy on the bid, or a small fraction above the bid. If the stock is moving fast because of news or an announcement, you will probably be forced to buy at the ask. When you place your order to buy on the bid or slightly above, it may take a long time to get filled. You may never get filled. At these times patience is a virtue. You may also want to try buying shares somewhere between the bid and ask.
If you have done your homework well and the company announces great news, such as winning a high paying contract with IBM, the stock will then take off, gaining 100% or more before others can even call their broker to buy shares. This is the reason for investing in these markets.
I do not recommend that you place all of your money in such a “High Risk, High Reward” market, but spend some time investigating penny stocks and you may be rewarded greatly. Remember: exercising due diligence is important for all investment decisions in any market.
About the author: Keith Guyette M.Ed, J.D. is a professional trader and the owner of a stock talk board thepennystockblog.com as well as the head stock analyst for bottompicks.com.