Nothing could be as lucrative than to trade in penny stocks over the counter or OTC for short. To begin with they are priced ridiculously very low costing just few cents or pennies each. In fact such micro stocks that are traded over the counter can never exceed $5 as per the strict SEC guidelines, if it is at all to qualify as penny stocks. Because they are priced exceedingly low, investors who look forward to make huge fortune by trading in stocks, buy penny stocks in large volumes hoping to trade them for big profits at the right opportune.
So for the same price at which you may be able to buy one or two stocks of a high priced blue chip stock you can buy quite a large number of these penny stocks of two or more small companies. Over and above one can even expect to see the price doubling up in a day or two, which is simply not possible for mid cap or large cap stocks traded on national stock exchanges such as the NYSE, NASDAQ or AMEX. Undoubtedly anyone wanting to build a huge fortune say by earning millions in a year or two can only hope to do so by staking their money in penny stocks of various small companies having a capital thats less than $200 million.
Why Penny Stocks are both Risky as well as Lucrative for Trading
Moreover a slight swing in the positive direction may raise the value of OTC stocks also called micro stocks few hundred times more in a day or two, which is simply unthinkable for large cap stocks.This happens because of their high volatility in their value that may climb either very high or very low than what its priced currently. Its because of this great volatile nature that what provides the requisite momentum to penny stock pricing as trading progresses by the hour. Such volatility can be so unpredictable many a time that it even becomes difficult for a highly seasoned trader to comprehend in which direction would the price actually follow. Its very much like the wind that can be a breeze or suddenly blow up into a storm at times or there could be total lull with no movement at all. The same is true for penny stocks too. There could be times when there is no trading at all and the penny stock has no takers for months if not years although when you brought them at a great price, there was tremendous interest and momentum in trading at that time. This alone makes trading in penny stocks so risky from an investment point of view. In fact penny stocks follow no scientific principles that would help you to guess its value at some point of time, like you might do so regarding the position of stars or comets in the heavens.
However as I have already mentioned if things work out in your favor then perhaps you have a better chance to win and make a fortune as you may do so while playing pokers or maybe slot machines. As part of your planning process you can choose your own best strategy to suit your temperament and the constraints of limited resources available at your disposal. What you can adopt best is a defensive tactics to minimize losses. To do so you have to find stocks of those companies that are in business which has substantial demand in the market as well as have a great future for growth and expansion. The sectors are perhaps those of Bio stocks, energy stocks or something niche which has tremendous potential that you can foresee. You have to scout such undervalued stocks that has been missed out by others and invest in them so that you may cash them when things are ripe.
What all Winning Strategy to Apply for Trading in OTC Penny Stocks
Now as per statistics 95% of investments fail hence its always best to spread your risks by diversifying as much as you can when trading in penny stocks of various OTC companies. Even if 95% of your portfolio fail and fall badly at least the rest can climb so high in value that it can pay you back several hundred times the value of your total investments. Once you recover the initial amount invested you can then play with house money i.e. with the surplus that you gained in returns. That is how it is not surprising to find many success stories where investors who dipped their toes into the stock market by investing just $200 in various penny stocks were able to make hundreds of thousand dollars in a year. This is what makes trading in OTC and pink sheet stocks so lucrative even though penny stocks are risky because of their great volatility.
But that is only one approach to a problem we have discussed.On the contrary there is no single full proof strategy for water tight solutions, in fact every single solution gives rise to yet another set of problems that has to be solved. Since it is not possible to predict what all problems might crop up eventually during trading it is best to stick to patterns. The more trading patterns you recognize from past history or experience, the better would it be for an investor. By analyzing each of these patterns you might at least recognize how a penny stock would behave provided all factors currently in tussle in the market remains as it is in the next few days without drastic change in “weather” patterns.
Importance of Fundamental and Technical Analysis
So to make your own analysis before taking any decision to invest, it is important that you learn all about Fundamental and Technical analysis. Its very much like making your choice of a pachyderm or a horse for investment. If you have to buy an elephant you have to learn all about elephants, their eating habits, their work culture, what all kinds of work it can be profitably employed, how much return it would give during its working life span after deducting the fixed costs for its upkeep such as food and health, salary to be paid to a trained mahout (the man who drives the elephant sitting atop), debts to be repaid back etc. How many babies would it be able to produce during its reproductive period, which could be further nurtured and trained for future growth and expansion of say lumber jack business, how much of the tusks would fetch as ivory cost etc. How much worthwhile is the timber business where the elephant would be employed, if it would remain stable since timber costs are unpredictable and many environment conscious countries like India is switching over to non-wood materials or importing them from Malaysia or Indonesia as wood is cheaper. Similarly if you buy horse, you have to understand what purpose is the horse is being purchased, since the horse that may be used in a traditional Indian wedding may not be suitable for a race horse. The pedigree and type of horse fit to win races etc. My idea on elephants as an example came after I just finished watching a TV Animal Planet program on “swimming elephants” of Andaman and Nicobar Islands in the Bay of Bengal in India.
So you have to find out for each stock what all are the Revenues and Earning, how competent it is vis a vis other companies in the same sector, the extent of its debt load, the current and future demand for such industry in both domestic and international market, joint ventures or partnership with other companies in similar fields, financial ratios (such as Return on Assets, Debt to Equity, Profit Margin, Return on Equity, Current Ratio etc.), market risks, press reviews and public relations, core management competitiveness and integrity, insider trading, buy back plans, institutional holdings and if its involved in any serious legal tangles, political policy and influence etc.
Other than able to understanding the health of a penny stock company, it is important that you make a technical analysis of the various chart patterns to understand the rise and fall in demand that has a strong influence over the price of any stock. For this you have to learn the different chart patterns and how best you can make a technical analysis of any penny stock so that you know what to do when the price rises and then dips to bottom out say in a cup and handle pattern, or when it breaks through resistance or a support point. How you can select your entry and exit points, setting up of stop losses, limiting losses etc.
Hedging as a Strategy to Protect your Investment
There is another way by way of which you can protect your investments which is by choosing hedge funds that complement each other, say you buy shares of oil and gas companies as well as those for transport companies. If the price of oil rises then it would be profitable for oil companies but not those of the transport companies, or when the oil prices goes down the transport companies would be improving their revenues. So which other way your investment remains protected. So accordingly choose your stocks very carefully for your portfolio, such that even if 3 of the 5 companies fail to deliver, you can cover up your cost from the gains made by the other two.
The Importance of Subscribing to Reliable Information and Newsletters
Now as a newcomer its quite easy to be overwhelmed with such a large number of stocks in the market particularly OTC penny stocks. To help you in your effort you would require professional help and use of software to help you with your detailed analysis of each of the penny stocks you target.
For this you will need the service of newsletters since information on OTC stocks are by and large sketchy and you need authentic insider information. Unlike stocks listed in national stock exchanges where details of each of the listed companies are easily available the same is not true for micro stock companies. Hence you have to subscribe to authentic newsletters to keep yourself up to date.