How to Invest in OTCBB Penny Stocks

The stocks may be cheap, but the losses can be steep.

The stocks may be cheap, but the losses can be steep.

Investing in OTC Bulletin Board-listed stocks is simple enough in process, but a difficult choice to make and carry out. Penny stocks are among the most common securities on the OTCBB, and many people are drawn to them for the potential for profit. Understanding the risks of penny stocks and the basics of trading them is a long process that requires a lot of study. Never think about it as a path to quick riches, because most of the time the deck is stacked against you.

Obtain a thorough understanding of the way the OTCBB market works. It is far less regulated than the major exchanges. The OTCBB has minimal requirements for companies to maintain, and there is little oversight. Scour the Internet for real sources of information before jumping into these stocks. Trading the stocks is simple enough. The processes are familiar ones. You need to understand how securities in the OTCBB move, and how the companies function.

Open a practice account to test your understanding, or make paper trades in a notebook to see what would happen if you started trading. Most brokerages that offer practice accounts, like OptionsHouse or TD Ameritrade, will allow you to easily open an actual account once they have your information.

Buy and sell OTCBB stocks -- whether real or in practice -- just as you trade other stocks, keeping in mind that in most cases margin cannot be used. Some brokerages have special rules for OTCBB stocks. The rules are noted on their websites.

Set aside money you can afford to lose. Consider it a 100 percent loss even before your first trade. This helps you decide how much to really invest instead of overextending yourself. It might be easy to start with $5,000, but if you can't afford to lose the $5,000 it is too much. This is probably one of the most critical steps. It also helps free you from concern. If you are panicking about the potential for losses, you might make rash mistakes. When you are ready to open a real account you can transfer this money to that account and segregate it from your overall finances.

Clear your schedule. You must watch the market all the time when you have open positions. The market closes, so it is like any other job. If you are skilled enough, then using your smartphone might work for you, but the penny market can be exceptionally volatile. You might be making a mint one minute only to have the price quickly turnaround in the next.

Start trading slowly. Rushing causes problems. It is better to sit back and wait for the right trade. The money you use is already considered a loss, so you have given yourself a free hand. Understanding different strategies and employing them will take time. Finding opportunities is all about patience. As you get more used to it, however, you will trade penny stocks like anything else.

Tip

  • It is extremely hard to find good information on penny stocks, and there are many scams out there. One of the best ways to learn is through conversations with other traders, and there are many online communities from which information about OTCBB stocks is available.

Warning

  • Some brokerages charge extra for penny stocks. Make sure you completely understand the fee structure before opening an account.

About the Author

Nihar Patel covers finance and investing for several online publications, including Seeking Alpha. He also runs his own investment analysis website. Patel holds a J.D. from UC Hastings College of Law, as well as a bachelor's degree in political science and history from UC Davis.

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