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sábado, 3 de enero de 2015

The truth about "Penny Stocks. We explain OTCMarkets thoroughly.

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At the request of many of our readers, we will explain in depth what are the penny stocks, how to tell if one of these listed companies in the OTCMarkets is reliable or otherwise, is a company of dubious credibility. Also let's break some myths about these stocks and shed some light to this high risk investment.

It is true that every large company started as a small company. Even Google, before being one of the most valuable companies in the world, in their beginnings had a couple of workers.  Every investor dreams of finding a company that is starting, buy their shares at $0.10 and in 10 years to have hundreds or thousands of shares worth $600 per share.

Many have probably heard the story of the trader who turned $1,500 into $1 million due to speculation in this market. There are even stories of investors who held shares at $0.003, and after the purchase of a large company, in one morning, these shares came to trade at $3, which makes this investor a millionaire in a single morning.

Of course enter the OTCMarkets with the idea of finding the new Apple, probably is an investment strategy, at least, risky and unlikely.

What exactly are Penny Stocks?

To begin we must distinguish the concept of "Penny Stocks" regarding the so-called low market capitalization companies. For the Securities and Exchange Commission (SEC) of United States, a low market capitalization company is any company whose market capitalization is between 50 and 300 million dollars.

Although the term "penny stock" applies to any company that trades below $1, the fact is that the high risk of penny stocks comes not so much from their assessment, but their origin and situation. However, any listed company which is trading under 1 dollar/euro, will always have more risk and probably more volatility than the rest, but it does not have to be a penny stock. Therefore, penny stocks through which many investors are defrauded come from OTCMarkets, and we will see why they have such a high risk.

Types of Penny Stocks

In the OTCMarkets we can find 3 levels of penny stocks and as with bonds, they are given a classification according to the risk of the company. These three levels are OTCQX, OTCQB and OTC Pink. We start with the highest risk.


OTC Pink


Of the three levels, OTC Pink (Pink Sheets) are of lesser quality, and include companies in default or with serious problems of liquidity and funding, as well as a large group of companies that still do not have even one product on the market . That is, some of them have no business and are a simple project or laboratory study. These companies do not meet the listing requirements, are not required to file reports with the SEC, and therefore any information given to investors is the data published by the same company These companies are not audited, so a trader could buy shares of a company that for over 12 months has no commercial activity.



OTCQB


These stocks are in the medium risk level. Like the OTC Pink, these companies do not have the minimum financial standards for listing on a decent market. Although unlike the OTC pink,  these companies do have the obligation to submit the required documents and accounts to the SEC. Still, here we find very small businesses or start-ups companies and no investor knows for sure whether they will end up being profitable at some point or eventually will disappear.


OTCQX

These companies already enjoy more credibility but still carry a high risk for investor. At this level of stocks we can find companies that do meet many financial standards because they are, in a sense, companies sponsored by other firms or large investors who bet on the future of this company. Investors do have access to transparent and audited accounts of these companies.

JP Morgan and Deutsche Bank are often "sponsor" to many of these firms serving as tutors and supporting them, which does not stop many of them end up not taking off. However, the probability of success when investing in one of these companies, even though low, is much higher than choosing the two previous options. In this link you can see what companies are listed on this level and who is sponsoring each company.

Why the high risk of these companies?

First, the increased risk of investing in one of these companies is the lack of information on the company in which we are interested, because although we see the name "Energy Corporation", that company could be installed in the bathroom of a house abandoned. As OTC pinks are not required to file statements with the SEC, usually these companies are the favorite of scammers.

Similarly, these companies pay the media to publish their own news, such as: "Energy Corporation increased its profits by 150% in the first quarter." No one can know whether it is true or not, and sometimes the company praise the good performance because it increase their earnings from $3,000 to $7000 a year for example, which is an increase of over 100%, but is not really a worthwhile income.

The origin of the company is also an added risk. While some of these companies are too new (no history), others are business driven out of stocks indices for the high risk and are sent to this market to agonize until their death.

The high risk of trading in this market

These companies do not enjoy much liquidity, so by investing just $1000 you alone can drive up the price even by 700%. The purchase order is almost always well received. The problem is that sales orders could become a real problem if we are not willing to sell well below the listed price (with a big loss of course).

How penny stocks prices are manipulated?


Taking advantage of the lack of information and low levels of liquidity, there are many companies and investors engaged in buying large quantities of shares of penny stocks at very low prices. Subsequently, these companies and investors indiscriminately send mass emails to retail investors from a large database, and/or tell many investors by telephone that they have inside information and that the company will rise sharply in the short term.



What they do is sell those shares to 300 or 500 percent more expensive, executing the strategy of "pump and dump", which is completely legal, since the seller has really just sold something that is yours to a buyer who has been willing to pay for it the price asked by the seller. The problem is that the buyer can not sell their shares in the absence of buyers, unless the inverstor agree to sell those shares to 50 or 75 percent cheaper.


Therefore, when you find very positive news on a penny stock in a financial news bulletin, there is a high probability that this news has been paid by the company itself or the brokerage firm that owns these shares.


False beliefs regarding penny stocks

Many investors are attracted to these shares traded at $0.0003, because they think they have much more space compared to regular stocks and can easily get to have high prices. Note that with $600 we could buy 2 million shares, so if that company goes up and eventually reach a value of $0.1, we would have a profit of $200,000. We will not say that this has not happened, but for every case of people who have made millions in the OTCMarkets there are 1,000 cases of investors who lost their shirts in the purchase of these shares.

The other misconception in which many fall into is thinking that companies like Apple had been a penny stock in its infancy. It is an argument used by fraudsters to sell these shares, because although we see in the price history  that big companies at some point were trading at $0.09, it is certain that these firms started their history in the stock markets at much higher prices.

But there is also a positive part in investing in penny stocks

Although these investments are not suitable for all investors because they are within an area of high risk of losing all our money, the fact is that if we analyze a company, we understand the sector of the company and see something coherent in the business, we could detect a great investment opportunity.

It is said that there are many companies working on interesting projects of solar energy for example, and that even the technology needed to maximize renewable energy at this time could be in any of these penny stocks firms. The problem is that there are many companies so it could be difficult to ascertain which of them is more likely to be acquired by a giant or becoming a profitable company itself.

And basically, this is what you need to know about penny stocks. It is a market where the risk is so high that if for some reason you do it right, you could make literally rich: However, the investor should always take into account that the probability to lose virtually all investment is very high, especially if you choose the first 2 options (pink and QB).







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