According to the Securities Exchange Commission of the US, OTC stocks or penny stocks are securities trading below $5 per share. In the UK, however, these stocks are traded for less than £1. These stocks are associated with high risks, and less liquidity as companies issue them without investment reputation.
But, for investors who get their strategies right, investing in penny stocks can be quite a lucrative move. This is because small stock companies have had a record of growing into global market leaders, featuring in the world’s top stock exchanges. However, due to their attributes, finding the right OTC stocks can be overwhelming.
This article provides you with the basic information necessary to identify and buy lucrative: micro-cap stocks, nano-cap stocks, small-cap stocks, or OTC stocks (Over The Counter Stocks), as they are also known.
Growth Trends in the Penny Stock Market
To yield significant returns from penny stock investment, you must be observant and reactive to growth tendencies in nano-cap stocks companies. You should be aware that, being OTC stocks, most companies report numbers that vary from the actual trends of their nano-cap stocks.
There is little regulation done on stocks traded in the Over the Counter (OTC) market, giving leeway to deceptive results as far as growth is concerned. You should also consider market sectors that are positioned for growth, which will also require you to launch a technical analysis of various industries.
Evaluate a company’s sales growth for the past four years and go for the company with over 10% growth in sales. Observe trends in the following areas.
- Profit margins
- Financial Ratios
Research the Winning OTC Stock
One of the essential steps to take when selecting penny stocks is researching these securities.
This research may include the following;
- Scrutinizing company data. The company you want to purchase OTC stocks from might not have a track record in investment. However, you should solicit the company’s details, such as vision, past performance, and financial statements. This is the only way you can verify that the company is not a scam.
- Evaluate the company’s cash flow. A cash flow statement is a vital indicator of the company’s spending patterns. You do not want to invest in a company that spends more money on financing (paying debts) compared to business operations and investment.
- Analyze the balance sheet and income statement of the company. The financial position of a company gets expressed through these documents.
Select the Right Penny Stockbrokers
Penny stock brokers provide you with the infrastructure necessary to carry out an exchange. One of the most important factors to consider is their fee structure.
This is because some brokers charge you extra fees and commission in every share, which can make the investment quite costly. Such a structure is ideal for investors buying very few securities and might not be suitable for OTC stocks traders.
Evaluate the OTC Stocks
Whether you are going for trending or undiscovered OTC stocks, it is essential to evaluate the key features of the stocks in question. When you identify stocks to buy, look into the following details’
- Availability of stocks
- Number of stocks available
- Number of stocks outstanding
- Planned activities or operations that are likely to affect share prices.
Assess Your Risks
Penny stocks are hazardous. Therefore, you should do your research to establish the degree of risk you should be anticipating. Fortunately, there are tools that you can use to make your predictions right. For example, you can use a penny stock simulator to analyze the position of the shares you intend to buy. The simulator is a virtual model used to depict all the features of an OTC stocks market. You should also consider buying penny stocks with high trading volume. This is because stocks with a low volume of trade are less liquid, which could put a risk of losing more money in case of negative swings in prices.
While OTC stocks are considered to bear high risks, finding the right ones may launch you into an investment that will dynamically grow in value for years. To find such stocks, you will need to observe trends that depict the growth of a company, research and select the winning stocks, and evaluate the identified penny stocks. You should also consider assessing the risks of your identified penny stocks before investing in them.