OTC:BB and BBX
INTRODUCTION: Most of the companies we feature trade on the OTC Bulletin Board. For those of you that are not familiar with the four levels of the exchange structure, they are as follows:
- NASDAQ NATIONAL MARKET (“NMS”)
- NASDAQ SMALL CAP
- OTC BULLETIN BOARD (“BB”)
- OTC PINK SHEETS
In order for a stock to trade on the National Market it must meet certain minimums qualifications. The Small Cap requirements are a little lower. The minimum requirement for the Bulletin Board is that the company be fully reporting, and in the Pink Sheets companies can be non-reporting. Pink Sheet stocks are not electronically quoted so the market can be hard to follow.
The BB has very little institutional participation, but it is growing. New regulations that were put into effect in the Spring of 1999 forced micro cap companies to become fully reporting or be delisted down to the Pink Sheets until they obtained full reporting status. In recent years the NASD has increased the minimum requirements for companies apply for a Small Cap listing. Today’s Bulletin Board is becoming the equivalent of what the NASDAQ Small Cap used to be.
OPPORTUNITIES: We find the BB a very attractive place for individual investors. Institutions generally don’t trade here, so the playing field is more level for the individual. The companies tend to have smaller public floats and lower market capitalizations, allowing for more upside potential when a company achieves success. Smaller public floats lend themselves to greater volatility to both the upside and downside.
The stocks which trade on the BB are generally not marginable, except for the margin facilities we know German and Austrian banks offer. This has two advantages to the individual investor- you cannot over leverage your account, and individual investors cannot short the stocks, which helps alleviate selling pressure.
In the past the BB had a well deserved reputation as a haven for scam artists. The recent changes in the qualification regulations and the stringent review process the SEC has placed on Companies in order to maintain their listings has helped clean this problem up considerably. Today, even the smallest of BB companies is subject to the exact same reporting requirements as AOL Time Warner or Boeing.
We are beginning to see a much greater flow of institutional participation in the Bulletin Board. The explosive growth of the NASDAQ over the past several years has lent itself to excessive valuations in many unproven companies. March’s dramatic sell of which took many high flyers down to 1/3 of their highs is proof that the market can get very overpriced. Entry levels for stocks can get too high.
Investors don’t mind risks, but the risk has to have upside potential. Too many companies with $3 million in trailing sales and substantial losses are trading at $1/2 billion market caps. Institutional investors are uncovering companies with the same financial performance, but with $50 million market caps on the bulletin board. Oftentimes these companies are not as well financed as their NASDAQ counterparts, so institutions are providing capital at price levels that provide acceptable upside potential.
STOCKS TO TRADE: There are over 4,000 stocks trading on the Bulletin Board today. Proactive public companies without a Wall Street following care about creating interest in their stock. As they grow they might require another round of financing. The better their stock trades the less dilution existing shareholders will suffer. This is where Stockreporter.de comes in.
Through our website Stockreporter.de and our partner websites we now have over 250,000 readers per month. The leverage of all these eyeballs, along with the recent market correction, has put us in a position to choose from some very exciting young companies for upcoming profiles. In future profiles we will only feature companies that we believe are likely to obtain their full NASDAQ listing (Small Cap or National Market) within six months of the release. Although there is no rational reason for it, making the jump from the OTC Bulletin Board to the NASDAQ seems to result in double in stock price.
INVESTMENT STRATEGY: A good strategy to use in a market like this BB segment is to allocate a certain portion of your capital to a stock you want to own. Start out by investing no more than 20% of the total amount you are prepared to commit in any single stock. That way you can add to the position if the stock trades lower and take advantage of other people’s weakness. This only applies to investors that are prepared to hold for at least three to six months.
A very important rule in a market like this: never buy a stock at the market when it gaps open. A gap occurs when a stock opens at a much higher price than it closed at the previous day. In a market like this, 80% of the time that stock will drop back down and fill the gap. Market makers have been using gaps to line their pockets with money from investors for years.
When market makers have market orders for a stock at the open, they will often take the stock up, fill the market orders at the higher price by shorting it to investors, and then drive the price back down. Then when they have scared enough people into selling, they cover their short and walk away with a tidy trading profit.
THE NEW BBX: The BBXSM is a proposed new marketplace that will eventually take the place of the BB. The BBX will appeal to many of the same companies that are currently quoted on the BB, but will be a higher quality market.
The BBX will have qualitative listing standards, but will have no minimum share price, market capitalization, or shareholder equity requirements. In addition, the BBX will have an electronic trading system to allow order negotiation and automatic execution. The new system will bring increased speed and reliability to trade executions, as well as improve the overall transparency of the marketplace.
BBX listing requirements have been created to provide an opportunity for the largest number of current BB issuers to continue trading in the new listed environment, while at the same time offering a full complement of qualitative standards to provide enhanced protection to investors. Under these listing requirements, companies must meet qualitative standards, but not do not have to meet financial or minimum share price standards.
