A Beginners Guide to Penny Stocks: Over The Counter Bulletin Board (OTCBB) and Pink Sheets

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OTCBB (Over The Counter) stocks and pink leaves are the two types of penny stocks you will come across. The main difference between the two is that OTCBB stocks must file with the SEC and pink leaf stocks are not. Some traders refuse to exchange pink sheets because of this, these traders miss great opportunities. Even Warren Buffet is known for looking for dumped companies in these markets.

Please note that trading in OTCBB and Pink Sheets is not for everyone. Often the stocks are illiquid and have a wide gap between supply and demand. There are also a lot of companies that have no value and that will try to pretend to be big companies while diluting their actions. Another concern about these actions is the fraud involved or the "pumping and dumping" plans where traders or company insiders have their actions "discussed" on bulletin boards or in chat rooms. The posters make unrealistic statements about the direction of the business and the price per share, while selling you their shares. The price per share then drops. You can avoid most of these problems with due diligence on your part. Take the time to read the documents, call the company and conduct a thorough investigation. This survey should take place with OTCBB stocks and pink leaves. Don't expect to find everything you need to know in the repositories.

After finding a stock you want to buy, you raise the price and find that there is a 30% difference between the "auction" price and the "asking price". Supply being what a trader is willing to buy a stock for and the demand that a trader will sell the stock for. Finding spreads of 30% or more is very common in these markets. If the stock is slightly traded with a large spread, you will want to buy on the offer, or a small fraction above the offer. If the stock is trading quickly due to news or an announcement, you will likely be forced to buy on demand. When you place your order to buy on offer or slightly above it can take a long time to be filled. You may never be satisfied. At these times, patience is a virtue. You can also try to buy stocks somewhere between supply and demand.

If you've done your homework well and the company is announcing good news, like winning a well-paying contract with IBM, then the stock will take off, earning 100% or more before others can even call their broker to buy actions. This is the reason for investing in these markets.

I don't recommend that you put all of your money in such a "high risk, high reward" market, but spend some time investigating penny stocks and you could be greatly rewarded. Remember: exercising due diligence is important for all investment decisions in any market.


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