What Are OTCBB And Pink Sheet Stocks?
OTCBB Stocks are called Over-The-Counter-Bulletin Board stocks. Some are considered OTCBB stocks to be high risk and other people love to invest in them. Unlike the pink sheet companies, OTCBB stocks are regulated. The two major over the counter stock trading markets are Over the Counter Bulletin Board (OTCBB) and the Pink Sheets securities.
The OTC Bulletin Board, is an independently operated, regulated electronic quotation system that displays real-time quotes, last sale prices, and volume information for OTCBB stocks. It is not a stock exchange or stock market therefore it has minimal requirements that must be met to be listed or remain listed. If a company does not meet the minimum requirements, they are traded on the pink sheets.
The OTCBB stocks are regulated by the National Association of Securities Dealers (NASD). They offer electronic regulation offering real-time quotes on the last minute sale prices and give information on the volume of the stock for over-the-counter equity securities. Companies must file financial statements that are current with the SEC.
They can also file their current financial statements with a banking or insurance regulator. The over-the-counter bulletin board stocks are liked by investors because of the on-the-fly real time quotes. Up-to-date information is extremely important when trying to buy or sell any type of stock.
The regulation of the OTCBB stocks and forcing the companies to file financial information makes these much safer than pink sheet companies that don’t have to file anything at all. In many cases, the OTCBB allows you to find more information on these companies helping you to make a better judgment on making a determination if you should invest or not.
Video Summary On OTC Stocks
Stocks traded on the Over The Counter Bulletin Board are smaller companies which are unable to make the listing requirements of the major stock exchanges and could possible be a company that has been delisted from the major stock markets. The stocks from these companies are commonly known as penny stocks, pink sheets and grey sheets stocks.
Since there have been technological advancements in trading software, stock traders are now able to trade OTC or OTCBB stocks online without any problems. Today, the number of companies within the OTC market is growing as companies are making their way up to the larger stock exchanges. So therefore it’s a good time to be adding OTC stocks to your trading portfolio.
Unlike NASDAQ and the New York Stock Exchange, OTCBB stocks do not have any listing requirements to be able to start trading. That is right. OTCBB stocks are not NASDAQ or New York Exchange stocks and many people don’t understand the difference when they first begin trading. Because of the instability of the OTCBB stocks, they are not favored too much by many.
OTCBB stocks are usually companies with small amounts of shares and it is very rare an OTCBB stock makes it to the NASDAQ. Although, it has been done and many of the OTCBB companies strive very hard to make it to the NASDAQ or the New York stock exchange. It just doesn’t happen very often.
What Is OTC Market Mean?
The OTC (over-the-counter) market began in 1990 on a trial basis as part of a wide range of market reforms that were being implemented to make the OTC equity markets more transparent to the average investor.
The Penny Stock Reform Act of 1990 instituted an electronic system for the OTC market. The purpose of the new electronic system was to see the difference between the spread of a stock, the price of a stock, and the number of shares being traded.
Starting in 1993 companies that traded on the OTCBB market were required to report stock trades within 90 seconds of a transaction. Now anyone can see the number of shares being traded in a stock, if the stock price is increasing or decreasing, if traders are buying or selling the stock, and the number of shares being traded in real time.
The full time operation of the OTC Bulletin Board was approved in 1997 by the Securities and Exchange Commission. Today any company that trades on the OTCBB has to report their yearly financials to the Securities and Exchange Commission, banking regulators, and also insurance regulators if they want to remain eligible to trade on the OTCBB.
If a company does not report their financials to the SEC and the regulators, the company’s ticker or stock symbol will receive an extra “e”. This additional “e” at the end of the ticker symbol lets investors know that the company has not reported its financials to SEC or to the regulators.
The company has 30 days to report their financials to the SEC and the regulators. If the company misses the 30 day grace period the company will then be delisted from the OTC and moved to the pink sheets.
This additional regulation implemented by the Securities and Exchange Commission has benefitted the average investor. Now the average investor is able to research up to date company financial statements before purchasing the stock of a particular company.
Penny Stocks vs. Pink Sheets
Nasdaq is a dealer network that operates as a stock exchange. While OTCBB stocks traded on the dealer networks, they do not trade on the Nasdaq. Penny stocks are considered OTCBB and trade over the counter (otc) some of these companies strive to become listed on exchanges such as Nasdaq. Penny stock are required to file with the SEC.
How Do I Buy OTC Stocks?
You can buy penny stocks from your online broker, Etrade, TD ameritrade or scottrade to name a few. Each of these brokers have different criteria for buying OTCBB stocks. None of these brokers will allow you to buy penny stocks on margin.
What Does Pink Sheet Mean In Stock?
Pink sheets are also called Pink quote and are traded over the counter. Pink sheets got it’s name from the color of sheets of paper where it’s quote was printed on.
Pink sheets are considered a tier lower than penny stocks. Although they are both traded on the OTCBB, penny stocks are required to file with the SEC while the pink sheets are not.
Many pink sheet companies strive to become listed on the OTCBB as penny stocks. Some pink sheet companies file with the SEC even though they are not required to file.
Are Pink Sheets Stocks Safe?
Although the internet has brought to light many hidden information regarding pink sheet stocks to the investor there are still risky. Here are 4 reasons why investing in pink sheets stocks is risky:
- Insufficient Information Given To The Public: One of the factor for success in investing is to be able to get sufficient information for better decision-making. However, information is not always available for pink sheets. This is because these companies are not compelled by the Securities & Exchange Commission to file information. Thus, pink sheets companies are not subject to as much public scrutiny as blue chip stock companies.
- Exemption from Most Documentary Standards: Pink sheets companies do not comply with all of the requirements of the major exchanges. This is the reason why they are traded through the pink sheets and OTCBB instead of the major exchanges. The pink sheets do not impose documentary requirements to penny stock companies. The OTCBB however, does require minimal filing of documents. The minimum standards include evidence of investor assets which could also serve as a benchmark in analyzing penny stock companies.
- Lack of Track Record: Pink sheet stock companies include companies that are nearing bankruptcy or those that are just newly formed. Thus, these firms would be those that will have very little or even no track record to speak of. The lack of history makes forecasting potential gains difficult.
- Lack of Liquidity: If a stock is not liquid there are two concerns that investors would raise. The first concern is that they may not be able to sell a penny stock as fast as other more liquid investments. Investments that lack liquidity run the risk of further decreasing in value during a sale transaction. The second, a lack of liquidity opens it to the practice of price manipulation by some stock traders. For instance, traders may hike up the price by buying a large bulk of stock. They do this only to sell it all when the price reaches its peak. The end result is that the price suddenly plummets as they dump it in the market this known as the pump and dump scheme.. This is one of the risks that investors take when investing in volatile penny stocks.
How To Buy OTC Stocks
It’s very easy to trade OTCBB Stocks. The first step is to find a reputable broker that allows you to trade OTCBB stocks. Ensure that the broker allows the trading of OTCBB stocks, penny stocks and pink sheets. Some brokers frown on this kind of trading or make it more expensive and difficult to trade them.
Once you have a good broker you can buy any stock or security you can afford. With certain stocks you will even be given margin. Margin allows you to buy more stocks than the amount of cash in your account.
You can not trade OTCBB stocks on margin. Before buying these low priced volatile stocks you need to do a lot of research. There are many reputable sites to research penny stocks. There are a few linked around our site here.
Picking stocks is easy, picking ones that make you money is more difficult. Its not that easy to pick good OTCBB stocks though. You have to wade through all the promotions, pump and dumps and front run stocks. These stocks are “pushed” by promoters and by smaller groups of traders looking to make a quick cash gain.
What Is Margin In Stocks And Are OTCBB Stocks Marginable?
Margin in the most basic sense is using money that you borrow from your broker to buy stocks or options. If you have a margin account, your broker will allow you to buy stock with money borrowed from the brokerage.
In most cases this increased buying power is used to buy more shares than without margin and not have to pay for them in full. Obviously there are benefits and negatives to trading on margin. Your risk of losing money and borrowed money is greatly increased. You also have a greater ability to make more money as well.
Some securities are non-marginable directly from the federal reserve board, while others are declared non-marginable by individual brokerages. The stocks declared non-marginable by the Federal Reserve Board are penny stocks, OTCBB Stocks, pink sheets, and initial public offerings (IPO).
Most often the stocks declared non-marginable by your brokerage are stocks that trade under $5.00 or stocks that have extremely high betas. Contact your brokerage for a list of stocks that are non-marginable. So are OTCBB stocks marginable? The answer is a definite NO!
The reason behind this is simple. The securities classified as non-marginable are high risk. Avoiding margin with them mitigates risk and the costs associated with excessive margin calls. All non-marginable securities must be funded in full with cash and they do not add to your margin buying power.
Should You Buy OTC Stocks?
There is nothing more exciting than watching the value of your stock soar and trying to determine when to sell. It’s a rush that keeps a lot of people trading stocks. Well, that and the financial benefit from making a great profit.
You must trade with rules and goals. Its easy to buy an OTCBB stock, watch it rise and you think it will rise forever and you forget to sell. Do you sell on the pullback, you should. A lot of penny stock traders think the stock will rest and then reach those heights again.
Sadly they often end up losing their hard earned money as the stock never regains that high again. Don’t be greedy, set your goal of a profit and take it when it comes. You must trade smart, buy the stock at the right time and sell the stock at the right time and you have a profit, sounds easy right.
What is your strategy for trading these stocks? Are you a long term investor? Do you want to be in and out in a day? A combination of trading styles is also good.
Just remember you bought the stock with a plan. Usually you buy thinking the stock will go up. If it doesn’t go up after you buy, you were wrong, that means you need to know how far down or how much money your willing to lose before you sell. “Plan your trade, Trade your plan”
Strategy is just as important. Is your goal to buy one winner and go for a doubler? Or is it to buy 10 securities and look for each to make minor gains?