What to Know About International Micro Cap and OTC Markets

What to Know About International Micro Cap and OTC Markets By Amelie Miles - March 09, 2021
What to Know About International Micro Cap and OTC Markets

What to Know About International Micro Cap and OTC Markets

Forget COVID – these days, everybody’s talking about stocks.

At the start of the pandemic, the average person on the street had nowhere to spend their money. But thanks to personalities like Barstool president Dave Portnoy, they soon found apps like Robinhood. Once they discovered how easy online trading was, they took to the markets.

Global stock exchanges haven’t been the same since. Within weeks, stories surfaced about the exploits of these newly-minted Robinhooders. For instance, Hertz (OTCMKTS: HTZGQ) saw its shares unexpectedly soar from 0.56 to a 2020 high of 5.53 in May 2020.

There were no fundamentals behind this rise – after all, Hertz had filed for bankruptcy shortly after the first wave of COVID began. Retail investors bought HTZGQ simply because they liked the stock. Or more accurately, it was cheap enough to buy en masse.

That’s why micro-cap stocks are hot right now. Want to get in on the action? Before jumping, realize there are real risks to investing. If you’re not careful, you can crater your life savings – or even funds you need to pay bills.

Knowledge is power. By doing your research, you can greatly reduce the risks associated with this class of investing. Read on below, and we’ll fill you in on the basics of micro-cap stocks and OTC markets.  

What is a Micro-Cap Stock?

In America, a micro-cap is any publicly-traded company with a market capitalization of 50 to 300 million USD. Because of their low valuation (relative to blue-chips), micro-cap stock prices are quite low – investors can purchase most of these equities for less than 10.00 per share.

Some analysts lazily use the terms micro-cap and small-cap interchangeably. Be wary of this, as there is a difference between the two. In the US, finance professionals define small-cap stocks as any publicly-traded entity with a market cap of 300 million to 2 billion USD. Often, these equities have double-digit stock prices (greater than 10.00).

So, when we say micro-cap stocks, we’re talking about the ones that cost less than 10.00 per share.  

Micro-Cap Stocks are an Attractive Investment

Everyone loves a good sale. Here’s why – unless your name is Jeff Bezos, you probably can’t afford to buy Class A shares in Berkshire Hathaway (NYSE: BRK.A). However, anyone can scoop up shares in Blackberry (NYSE: BB), Nokia (NYSE: NOK), or AMC Theaters (NYSE: AMC). That’s why retail investors buy micro-caps.

However, many seasoned traders also love this sector. Growth investors are always on the outlook for the next success story. Those that hitched their wagons to AMZN and AAPL (like Microsoft in 1997) have profited handsomely from their bets.

Value investors also poke around micro-caps. The value of these companies is often too low for many investment firms to bother with. As a result, many of these companies are tragically undervalued.

And of course, gamblers love micro-caps for their volatility. Bet on the right stock and double (or even triple) digit gains are not out of the question.  

Don’t Invest More Than You Can Afford

Before you shovel your life savings into TSNPD, stop. “Stocks only go up” may be a hot meme at the moment, but let’s get real – they can also tank. Some equities can even go to zero. CYNK is the most dramatic example of this – after hitting on 21.00 after weeks of pump-and-dump hype, it plunged to 0.00 within days.

Most micro-cap stocks are legitimate companies. Many are startups that have launched a successful IPO. Lacking the fanfare of companies like Facebook (NYSE:FB), they have to improve shareholder value the hard way.

However, quite a few micro-caps (usually on OTC markets) have skeletons in their closet. From companies that are bankruptto firms that engage in “creative accounting”, these misgivings can trigger a sell-off if they are ever exposed. At such low valuations, drops as steep as 80% can happen without warning.

Wait a Second – What are OTC Markets?

Stock exchanges are popular because they allow businesses to raise vast quantities of cash. However, not all firms can meet listing requirements imposed by the NYSE or NASDAQ.

So, rather than fight for the affection of venture capitalists, some companies opt to issue shares via OTC markets. OTC stands for over-the-counter, which refers to brokers that issue OTC equities. The expense of getting listed via OTC platforms, both in terms of time and money, is much less. 

For example, on Colonial Stock Transfer, if you have a Letter of Introduction, are listed with a US reporting company, and can meet a minimum bid price of 0.01, you’re in.

However, standards can vary greatly from one broker to the next. While many prohibit bankrupt companies from trading, not all do. So, before buying anything over-the-counter, learn more about OTC markets on Insider Financial.

OTC Trading is 100% Legal

As you now know, OTC trading can be risky. But risky doesn’t mean illegal. We won’t deny reality – OTC platforms are home to more than their share of scams. But remember – up until 2002, Enron traded on the NYSE and NASDAQ. 

Our point is this – you’ll find fraudsters anywhere money changes hands. Thus, the presence of scams does not mean an entire activity is a scam or illegal. If you do your due diligence, you can find moneymaking opportunities on OTC markets that are 100% legit.   

You Can Buy OTC Stocks on Most Trading Platforms

The days of buying OTC equities over the phone are behind us. Today, you can purchase OTC stocks from mainstream brokers like Fidelity Investments and Charles Schwab. So in seconds, you can own a piece of micro-caps like HUMBL (OTCMKTS: TSNPD).

Just keep the risks of OTC trading in mind, hedge against potential losses, and you’ll likely be fine.

The Risks are Real, but so are the Rewards

We all want to thrive. But to realize anything beyond incremental gains, you need to embrace risk. Now, that doesn’t mean ignoring the dangers of speculative investing – it means assessing them and taking appropriate counteractions. 

So don’t YOLO your life savings into TSNPD or GME. Rather, start by setting up a secure portfolio. Then, open up a second account, equal to 2%-10% of your total assets. That way, you can chase moon shots while securing gains from your slow-but-steady blue-chip portfolio.

By Amelie Miles - March 09, 2021

Leave a comment