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Microcap Stocks & OTCBB

What are Microcap Stocks?

The term microcap or micro-cap (also see penny stocks) is used for publicly traded companies having a market capitalization of roughly $250 million or less. Those make up only a small part of the total Stock Market, although a vast majority of US Stocks still fall under this category. Most are traded on over the counter exchanges, and their prices are quoted on the OTC Bulletin Board (OTCBB) or the Pink Sheets. The majority of companies that fall into this category are unstable and their stocks will almost certainly be highly volatile. Larger, more established microcaps are often listed on the NASDAQ Small Cap or American Stock Exchange (AMEX).

What is OTC Bulletin Board?

The OTC Bulletin Board ® (OTCBB) is a regulated quotation service that displays real-time quotes, last-sale prices, and volume information in over-the-counter (OTC) equity securities. An OTC equity security generally is any equity that is not listed or traded on NASDAQ ® or a national securities exchange. OTCBB securities include national, regional, and foreign equity issues, warrants, unit investment trusts (UITs), and American Depositary Receipts (ADRs). It also lists Direct Participation Programs (DPPs) that are not listed on an organized market but are being traded over-the-counter (OTC). Approximately 3,600 companies are tracked on the OTCBB. To qualify for inclusion, they must report their financial information to the Securities and Exchange Commission (SEC) or appropriate regulatory agency. Stocks that trade on the OTCBB, will have the suffix ".OB".

How To Evaluate A Micro-Cap Company?

Microcap companies don't generate fat investment banking fees for Wall Street firms, so they rarely enjoy regular research coverage by analysts. When it comes to analyzing a microcap company, the approach is the same as for a larger company; only what you emphasize in this analysis will differ. You should observe valuation ratios, such as the price/earnings multiple or price/book multiple, to see if the stock looks cheap or expensive. Like any potential investment, you might start out by assessing the current stock price against its 52-week high/low trading range. You'll probably review the company's financial statements to learn how much net profit is being earned on revenues, how high debt levels are compared to the company's capital base and whether the company is generating cash or burning it. Once you studied and evaluated a microcap company, you can make an informed decision as to where to invest your money.

Microcap Risks :

Microcap stocks trading on Over The Counter Bulletin Boards involve a greater degree of trading/investing risk at least in part because they tend to be thinly traded, which means less trading liquidity. Many fraudsters use that to there advantage and create scams such as the Pump and Dump, Boiler Rooms and other methods of manipulating the penny stock market. It is strongly advised to only use information coming from reliable and trustworthy sources, and not base yourself on press releases or SPAM e-mails with stock tips as many are questionable and they are usually not accurate.

A Comparison of the Nasdaq to the OTCBB :

There are very significant differences between firms listing their securities on the OTCBB and Nasdaq.  It is relatively easy to obtain a listing on the OTC Bulletin Board. On the other hand, Nasdaq, as well as the other major United States exchanges, has rigorous listing standards to ensure a minimum quality of its issuers. Beginning in 1999, the only requirement of significance for inclusion in the OTCBB is that an issuer be current in required periodic filings with the SEC or other appropriate federal regulatory authority; prior to 1999, even disclosing financial statements was optional. The major United States stock exchanges have specific quantitative and qualitative listing and maintenance standards that are stringently monitored and enforced.  Companies listed on one of those exchanges have reporting requirements to the exchange and a direct relationship exists between both parties. In contrast, the OTCBB does not impose a minimum level of financial standards, and there is no business relationship between the quotation service and the issuers. This explains the greater risks involved when investing in Microcap stocks which trade on OTC Bulletin Boards.

Misleading Public Information :

The significant lack of reliable, available information about microcap companies opens the door to fraud. It's much easier for fraudsters to manipulate and control a stock when there's little or no information available about the company. Most of the companies trading on the OTCBB have an exceptional lack of history, which only makes it easier for scammers to manipulate a microcap stock. Fraudsters have a few different ways of somewhat controlling the market when they apply themselves, "Boiler Rooms" and the "pump and dump" are the most popular techniques and unfortunately still going on. When looking to invest into microcap stocks, carefully analyze information handed to you so you can make an educated decision.

For More Information Regarding OTCBB & Microcap:

1. Advantages of Online OTCBB Stock Trading

2. Bulletin Board Empire

3. Market for 'bulletin board' Stocks launched

4. Microcap Traders Data Service

5. OTCBB Dealers Against NASD

6. OTCBB Domestic Securities

7. OTCBB Trading Securities

8. Over the Counter Microcap Markets

 

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