The Cavalier Daily
Monday, November 20, 2000
Business

Penny stocks reap serious change

Small-cap OTCs can be a high-risk, high-yield investment alternative


Matt Durante, Cavalier Daily Staff Writer

For young investors, putting hard-earned summer money into technology stocks shows less promise than ever before. Wanting immediate, high returns on their investment, risk-tolerant investors need to find a quick way to double their money in a tech market that has taken a nosedive since March.

Airline, oil and retail stocks are too boring: They're too stable. They could go up 50 percent over the next two years. Mutual funds might do a quick double after three years. But what if there is a dirt-cheap stock out there that may increase 25 times its value in a matter of weeks, regardless of overall market conditions? Exit NASDAQ. Enter OTC Market.

In the OTC (Over the Counter) Market, a savvy investor can find the future Ciscos and Oracles before they are even worth $1 per share. Commonly known as "penny stocks," shares of these stocks can rise from 10 cents to $2 per share in this highly volatile but rewarding market. Successful examples include: eDigital (EDIG), a company that specializes in portable digital devices, went from 4 cents per share to $24. Xcelera (XLA), a European Internet technology company, skyrocketed from 2 cents to $110.

After learning the basics about the OTC market, young investors realize that the risk-reward potential in this market is in favor of reward. A well-informed penny investor may have the knowledge to buy into the next America Online before anyone else knows about it.

One can think of stocks in the OTC market as a bunch of NASDAQ and AMEX rejects that did not meet listing requirements. But these stocks also may be viewed as tiny upstarts trying to make it to the bigger exchanges without the backing of private venture capital.

During a recent study on high-risk investments, the Wall Street Journal found that from 1995 through 1998, high-risk investment returns were above average in the major markets while the OTC under-performed with a greater degree of risk.

Some experts, however, argue that the past two years have seen a less risky environment in the penny stock world. "The study, I think, focuses on an OTC market that for the most part does not exist," said OTC News Network reporter Giando Argentina. "The market has seen increased liquidity and better company reporting rules in the past two years with more changes on the way."

Better regulations to decrease investing risks lead to a more informed investor. For example, any OTC stock that fails to file its quarterly report before a certain time is dubbed with an "E" at the end of its ticker symbol - a red flag for potential investors who are wary of the company's business fundamentals. The company then has an additional 30 days to file its quarterly report. If nothing is filed within 30 days, the company receives a "P" at the end of its ticker.

The first step to becoming an informed investor is to understand that supply and demand do not usually govern how shares are traded in the OTC market.

Small brokerages - often called market makers - sometimes unfairly handle the exchange of penny stock shares by trading more shares than what the company authorizes and by manipulating share prices.

Not only are investors aware of this manipulation, but OTC companies and even the Securities Exchange Commission (SEC) have taken notice as well.

"I personally do not think our stock price reflects our true market value," said John L. Threshie Jr, president and CEO of the Tirex Corporation (Ticker TXMC). "Steps are being made by the SEC to deter market maker manipulation."

Another way to become informed is through message boards. Ragingbull.com, a successful Web site founded by two former University students, is a huge forum for penny stock investors. But remember to stay clear of all the hype, rumors, and lies that are posted from time to time. The people to trust on message boards are those who will point new investors to factual research on a particular company.

How to pick a "20 bagger" - a stock that increases 20 times its value - is all about one word: fundamentals. Browsing through press releases is not enough. Carefully reading company reports is the best place to start.

These reports can be downloaded for free from a variety of Web sites. It is also not a bad idea to call the company and ask to speak with one of the directors, or even the CEO. Small companies are very friendly to new investors and will answer many questions about the company.

Once the potential investor gathers this information, it is time to analyze whether or not the company has what it takes to gain market power in its particular sector or industry.

So when the check is cleared at E*Trade, Ameritrade or Datek and it is time to make that first purchase, remember that there is another exchange out there with plenty of winning picks from which to choose.

Other Articles by Matt Durante

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