Guide to Risk Management in OTC Markets and Playing Penny Stocks


We live in heady times. Everywhere you look, prices are on the rise. From groceries to gasoline, our cost of living has suddenly begun to soar. But why?

The answer lies in our nation’s money supply. To cope with the Coronavirus pandemic, the US government rolled out unprecedented stimulus programs. To fund them, the US Federal Reserves fired up the printing presses. Day and night, they churned out the US dollars needed to fund stimulus checks, the PPP, and more.

By the time the money printer stopped brrring, the supply of US dollars had exploded. By the end of 2020, the amount in circulation had almost doubled. But at the same time, interest rates have remained near zero.

Because of this, sticking dollars in a savings account is a losing play. So Americans are putting their extra cash into stocks. You may be one of them. But there’s a problem – the stimulus checks weren’t that big, and many of us are still struggling. As a result, many are opting to invest in penny stocks on the OTC markets.

However, this sector is a perilous place. In today’s post, we’ll discuss the hazards of penny stocks and the OTC markets. We’ll also lay out a game plan that’ll help you invest safely in these equities.

What are OTC Markets?

Let’s start by defining the abbreviation OTC. The OTC in OTC markets stands for over-the-counter. This term refers to the fact that OTC investors get their shares directly from a dealer rather than a centralized exchange.

These dealers offer equities that don’t meet mainstream exchange listing requirements. But that doesn’t mean that these publicly traded companies are shady. Rather, foreign firms often use OTC markets to offer investors a chance to invest in their operations. And cash-hungry startups use them to avoid the pitfalls of venture funding.

However, don’t let your guard down. OTC markets are also notorious for their lack of regulations. Because of this, there are many companies on these markets that are bankrupt, shadily-run, or are outright scams. Later in this post, we’ll discuss tips that’ll help you stay safe while trading OTC stocks.  

What are Penny Stocks?

Penny stocks have an official and an unofficial definition. Officially, the Securities and Exchange Commission (SEC) defines penny stocks as any equity worth less than 5.00 per share. As a result, you can find “penny stocks” on any centralized exchange.

But unofficially, most people define penny stocks as any equity worth less than 1.00 per share. As in, you could pay for your shares in pennies – if dealers accepted them, that is.

These stocks are popular for obvious reasons. But we’ll spell it out for you anyway – thanks to their low cost, everyday people can scoop up these shares in large quantities. So if the price of these equities rise significantly, the resulting profits can be immense.

However, penny stock investing is a double-edged sword – upswings may lead to fat profits, but downswings can wipe you out. Beware!   

Only Invest What You Can Afford to Lose

OTC trading carries massive downside risks. The fact that some online brokerages allow margin trading only makes things worse. If you’re overextended when a penny stock crashes, you could be on the hook for massive losses.

For this reason, it is imperative you only play with money you can afford to lose. Keep what you need to pay your bills in your checking account. After everything’s covered, then you can divert funds to your investment account.

And even then, most of your investments should be in blue-chips. Like it or not, most successful investment portfolios are drop-dead boring. When you begin investing, devote no more than 2% of your bankroll to penny stocks. Even aggressive investors usually don’t allocate more than 10% of their portfolio to OTC stocks, so don’t feel like you’re missing out – you’re not.

Do Your Research

To find consistent success trading penny stocks, you have to do your homework. Otherwise, you’re no better than the bingo players trying to luck their way to wealth.

Start by figuring out what interests you. By sticking to a sector you know well, your odds of success will be that much higher. Then keep an eye on current events. By reading news on penny stocks and OTC markets, you’ll notice when specific companies keep getting mentioned.

But don’t stop there. Deep dive into their financial statements. Listen to investor calls. Get a sense for the trajectory of the firm you’re studying. In time, you’ll gain a fingertip feel for equities that have potential.   

Watch Out For Pump & Dumps

During your research sessions, you may come across articles that are curiously written. They contain tons of appeals to emotion, which invoke a fear of missing out. These are meant to attract those with a lottery mentality, as they are most apt to fall for these pitches. These schemes are known as pump & dumps, and they claim countless victims every year.

If you hear mentions of “going to the moon,” “a once in a lifetime opportunity,” “you only lose money if you sell,” or other hyperbolic phrases, these are all red flags. Avoid them at all costs. 

Be Smart, and You’ll Prosper in the Long Term

Investing is a discipline. As a result, it only rewards those prepared to put in the work. Far too many treat the market like a slot machine, only to get upset when it doesn’t shower riches upon them. Investing is like any sport – the more you practice your skills, the better you’ll get at them.

Put in the effort, and over time, your long hours will bear fruit.