Learning to Trade Penny Stocks: Over The Counter Bulletin Board
(OTCBB) and Pink sheets
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.