Topic: Penny Stocks

What is over-the-counter trading?

Canadian Penny Stocks

Over-the-counter trading is for investors who don’t mind risk and are willing to chance losing their money.

Over-the-counter trading is a term used to refer to the buying and selling of stocks via a dealer network instead of one the major exchanges like the TSX, NYSE, and Nasdaq.

Most companies that trade via these dealer networks are small, have a bad credit history or do not meet other listing requirement the major exchanges have. Most stocks that trade over-the-counter (OTC) are considered penny stocks.

In the end, over-the counter trading is for investors who are not afraid of losing the money they invest.

10 Stocks to Buy and Hold Forever

If you have six or seven of these stocks in your portfolio, well done. These are stocks with staying power. They are companies that can withstand market setbacks like the one we are in now—they pay dividends, for one thing—and they’re usually first to move up when the market recovers.

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We think you should avoid stocks that trade over-the-counter—that is between dealers, rather than on an established stock exchange—where such things as regulatory reporting are lax.

Below are some helpful tips that aggressive investors can use to make better over-the-counter trades.

Aggressive stock picks have the potential to give you bigger gains than your conservative selections. Still, aggressive stocks are best suited to investors who can accept substantial risk in the portion of their portfolios that they devote to these types of investments.

You can be wrong on any of your stock picks, of course. But when you’re wrong on a over-the-counter trade, your losses are likely to be bigger than they would be with a well-established company.

Here are four key ways to cut your risk in aggressive investing. They’re at the heart of our approach to picking aggressive stocks.

  1. Limit aggressive holdings to 30% of your overall portfolio. Because aggressive stocks expose you to a greater risk of loss, we recommend limiting your aggressive holdings to no more than about 30% of your overall portfolio. That’s not an invariable number. Ultimately, the percentage of your portfolio that you should hold in either conservative or aggressive investments depends on your personal circumstances and risk tolerance. An investor with a longer time horizon or without the need for current income from a portfolio can invest more money in aggressive growth stock picks. But we think 30% is a good rule of thumb.
  2. Spread your aggressive holdings out across the 5 main economic sectors: As with your more conservative holdings, we recommend that you cut your risk by spreading your aggressive holdings across the five main economic sectors (Manufacturing & Industry; Resources; Consumer; Finance; and Utilities). Compared to a conservative investor, you may choose to invest more heavily in Manufacturing and Resources, the two riskiest sectors. If so, take care to spread your money out across the many industries within each of these sectors. That way, you protect yourself from an unforeseeable industry downturn.
  3. Stay focused on investment quality: You’ll want to avoid loading your aggressive  portfolio with “penny mines” (speculative mining stocks that have not yet proven they have a mineral deposit that can be mined at a profit). You’ll also want to buy few, if any, “concept stocks”—junior industrials that have a business plan but have not yet established a real business, much less made a profit or paid any dividends. Stocks like these expose you to a serious risk of total loss.

    In contrast, the companies we select have established a business and have at least some history of building revenue and cash flow. They are well beyond the risky start-up phase where so many companies fail.

  4. Apply our sell-half rule. Selling half after a double is a good strategy for a high-risk investment, such as a penny mine. In fact, we routinely advise selling half of any high-risk investment that doubles. This can give you a clearer perspective on what to do with the other half of your investment. After all, if you are too slow to sell speculative stuff, your profits and even your principal can evaporate all too quickly.

If you have the right temperament to take on the risks of aggressive investing, you can achieve exceptional gains. But it is all the more important to focus on investment quality when you invest aggressively, and it is always a good policy to confine these investments to just a portion of your portfolio.

Do you have experience with over-the-counter trading? Was it profitable? Share your experience with us in the comments.


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