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Broker-dealers cannot use their knowledge of customer orders to provide customers with inferior prices. For example, buying a security for less than a known Limit Order price and then selling the security to the customer at the Limit Order price.
On most stock charts, volume bars are displayed at the bottom. With this historical picture, it is easy to identify the following:
Reactions prior to and after important events.
Past and present volatility.
Historical volume or trading levels.
Relative strength of a stock versus the overall market.
The Financial Industry Regulatory Authority (FINRA) regulates broker-dealers that operate in the over-the-counter (OTC) market. Many equity securities, corporate bonds, government securities, and certain derivative products are traded in the OTC market.
Once broker-dealers accept an offer to trade through OTC Link or through another means of communication, they must report, clear, and settle the trade. Part of this process is the confirmation of the trade with the investor; however, the trade will not be complete until final settlement (the delivery of funds by the buyer and securities by the seller), which, for equity securities is generally three business days after the trade date (T 3).
The flow of information has become faster with the Internet, and surprises are factored in instantly.
All OTC securities are assigned a market tier based on their reporting method (SEC Reporting, Alternative Reporting Standard) and disclosure category – Current, Limited or No Information. Securities on OTCQX, the highest tier of the OTC market, are required to have Current disclosure and meet minimum financial qualifications. Securities in OTCQB tier must be SEC, Bank or Insurance reporting and must be Current in their disclosure.
Trader's Remorse
Not all technical signals and patterns work. When you begin to study technical analysis, you will come across an array of patterns and indicators with rules to match.
Many OTC equities are Penny Stocks. Penny Stocks Can be Very Risky. Due to the high level of risk involved in investing in Penny Stocks, brokers cannot sell a Penny Stock to any person unless it has approved that person's account for penny stock transactions and the broker/dealer has received agreement to the transaction in writing from the customer.
After Lucent declined, a trading range was established between 40.5 and 47.5 for almost two months (green oval).
The National Quotation Bureau changed its name to Pink Sheets LLC in 2000 and subsequently to Pink OTC Markets in 2008. The company eventually changed to its current name, OTC Markets Group, in 2010.[5] Today, a network of over 160 broker-dealers price and trade a wide spectrum of securities on the OTC Markets platform.
Companies that follow the International Reporting Standard or the Alternative Reporting Standard by making filings publicly available through the OTC Disclosure
Even though there are some universal principles and rules that can be applied, it must be remembered that technical analysis is more an art form than a science.
The security is being promoted to the public, but adequate current information about the issuer has not been made available to the public. OTC Markets believes adequate current information must be publicly available during any period when a security is the subject of ongoing promotional activities having the effect of encouraging trading of the issuer's securities.
Business Acumen
One of the most obvious, but less tangible, rewards of fundamental analysis is the development of a thorough understanding of the business. After such painstaking research and analysis, an investor will be familiar with the key revenue and profit drivers behind a company.
In a new account agreement, you must specify your overall investment objective in terms of risk. Categories of risk may have labels such as "income," "growth," or "aggressive growth."
Fundamentalists do not heed the advice of the random walkers and believe that markets are weak-form efficient. By believing that prices do not accurately reflect all available information, fundamental analysts look to capitalize on perceived price discrepancies
Quotes for all OTC securities are available on OTCMarkets.com by entering a symbol in the quote search area at the top left of any page. All OTCQX securities display real-time level 2 quotes while all OTCQB and OTC Pink securities display real-time inside (best bid and ask) quotations. Quotes are updated from 6:00 AM to 4:00 PM on all trading days.
They are also likely to believe that there is little or no value in analyzing past prices and that technical analysts would be better off stargazing.
Many foreign issuers adhere to the listing requirements of qualified Non-US Stock Exchanges[8] and make their home country disclosure available in English.[9] There are also a significant number of US issuers who are current in their reporting to regulators[10] such as the U.S. Securities and Exchange Commission (SEC) or make available ongoing quarterly and audited annual financial reports through OTC Markets Group.
The word "securities" refers to any tradable financial instrument or quantifiable index such as stocks, bonds, commodities, futures or market indices.
OTC market structure is very similar to other equity security markets. A key difference, however, is in the actual trading process, which will be explained in Part 2 – Trading.
Narrow Within the Group
Once the industry group is chosen, an investor would need to narrow the list of companies before proceeding to a more detailed analysis. Investors are usually interested in finding the leaders and the innovators within a group.
A decentralized market of securities not listed on an exchange where market participants trade over the telephone, facsimile or electronic network instead of a physical trading floor. There is no central exchange or meeting place for this market.
Broker-Dealers – FINRA registered broker-dealers may participate in the OTC market by executing client orders and principal orders. Broker-dealers earn revenues from commissions charged on orders, the bid (buy) and ask (sell) spread (the difference between what an investor is willing to buy and sell a security), and principal trading (investing the firm’s capital in an investment/trading strategy).
Where Is Support Established?
Support levels are usually below the current price, but it is not uncommon for a security to trade at or near support.
In the OTC market, companies that qualify and are current in their financial disclosure may choose to apply their currently tradeable security(ies) for OTCQX. Companies may also choose to provide adequate disclosure either to regulators or OTC Markets Group in order to be classified in a ‘Current’ OTC Market Tier.
Switching back and forth may cause confusion and undermine the focus of your analysis.
Investor-focused companies may use either the OTCQX requirements, SEC Reporting or OTC Markets Alternative Reporting Standard to provide transparency to individual investors and the professional investment community. These services increase the flow of information, raise the profile of OTC companies, improve price discovery, and increase trading and liquidity in the OTC market.
To assess a industry group's potential, an investor would want to consider the overall growth rate, market size, and importance to the economy. While the individual company is still important, its industry group is likely to exert just as much, or more, influence on the stock price.
When you open a brokerage account, you must sign a new account agreement. You should carefully review all the information in this agreement because it determines your legal rights regarding your account.
Resistance breaks and new highs indicate buyers have increased their expectations and are willing to buy at even higher prices.
When a security is suspended or halted, OTC Markets removes all market participants and their quotes from the system and displays a "Halted/Suspended" message.
For instance: A sell signal is given when the neckline of a head and shoulders pattern is broken. Even though this is a rule, it is not steadfast and can be subject to other factors such as volume and momentum.
OTCQB companies must be registered with and reporting to the SEC or a U.S. regulatory agency. There are no financial or qualitative standards to be in this tier.
Once this information becomes public knowledge, prices adjust instantaneously, so it is virtually impossible to profit from such news.
Short selling carries with it unlimited risk because the purchase price of a security can rise to any price point. Conversely, long investors (buyers) may only lose the amount invested – if, for example, the security price drops to zero.
The Basis of Technical Analysis
At the turn of the century, the Dow Theory laid the foundations for what was later to become modern technical analysis.
Designed for companies with financial reporting problems, economic distress, or in bankruptcy to make the limited information they have publicly available. The Limited Information category also includes companies that may not be troubled, but are unwilling to provide disclosure pursuant to to OTC Pink Basic Disclosure Guidelines. Companies in this category have limited financial information not older than six months available on the OTC Disclosure
Financial Analysis
The final step to this analysis process would be to take apart the financial statements and come up with a means of valuation. Below is a list of potential inputs into a financial analysis.
Accounts Payable
Accounts Receivable
Acid Ratio
Amortization
Assets - Current
Assets - Fixed
Book Value
Brand
Business Cycle
Business Idea
Business Model
Business Plan
Capital Expenses
Cash Flow
Cash on hand
Current Ratio
Customer Relationships
Days Payable
Days Receivable
Debt
Debt Structure
Debt:Equity Ratio
Depreciation
Derivatives-Hedging
Discounted Cash Flow
Dividend
Dividend Cover
Earnings
EBITDA
Economic Growth
Equity
Equity Risk Premium
Expenses Good Will
Gross Profit Margin
Growth
Industry
Interest Cover
International
Investment
Liabilities - Current
Liabilities - Long-term
Management
Market Growth
Market Share
Net Profit Margin
Pageview Growth
Pageviews
Patents
Price/Book Value
Price/Earnings
PEG
Price/Sales
Product
Product Placement
Regulations
R
These institutions manage portfolios of derivatives involving tens of thousand of positions and aggregate global turnover over $1trillion. The OTC market is an informal network of bilateral counterparty relationships and dynamic, time-varying credit exposures whose size and distribution are tied to important asset markets. International financial institutions have increasingly nurtured the ability to profit from OTC derivatives activities and financial markets participants benefit from them. As a result, OTC derivatives activities play a central and predominantly a beneficial role in modern finance.
Alternatively, even strong management can make for extraordinary success in a mature industry (Alcoa in aluminum). Some of the questions to ask might include: How talented is the management team? Do they have a track record? How long have they worked together? Can management deliver on its promises? If management is a problem, it is sometimes best to move on.
Investor-focused companies use the quality-controlled OTCQX platform to offer investors transparent trading, superior information and easy access through their regulated U.S. broker-dealers.
Support and Resistance Zones
Because technical analysis is not an exact science, it is useful to create support and resistance zones. This is contrary to the strategy mapped out for Lucent Technologies (LU), but it is sometimes the case.
As an art form, it is subject to interpretation. However, it is also flexible in its approach and each investor should use only that which suits his or her style. Developing a style takes time, effort and dedication, but the rewards can be significant.
The best way to illustrate the OTC market trading process is to step through a specific example. This example is tailored for individual investors, although many of the same principles apply to institutional investors.
Pictorial Price History
Even if you are a tried and true fundamental analyst, a price chart can offer plenty of valuable information.
Charts are much easier to read than a table of numbers.
FINRA requires every member to trade a security at its publicly quoted (OTC Link or FINRA's OTC Bulletin Board) price and size.
Where Is Resistance Established?
Resistance levels are usually above the current price, but it is not uncommon for a security to trade at or near resistance.
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