Interesting piece I found (stole) on another board. Newbies like me may be interested.
Posted by: pennyfears
In reply to: None Date:4/23/2007 2:15:00 PM
Post #of 37
Good article on the OTC.
Over-the-counter stocks can offer
over-the-top risks — and rewards
BY AMY GRIFFITH
agriffith@nashvillecitypaper.com
It’s not always easy to find a broker with knowledge of
over-the-counter stocks. On the risk continuum, many consider
the shares to be a few steps above blackjack.
But not everybody. Some local investors — not to mention
editors and writers with publications, including The Motley
Fool and Business Week — believe that, when
thoughtfully chosen and closely watched, over-the-counter
stocks can be money well spent.
“The perception is, ‘Don’t touch them,’” said Buzz Heidke,
president of Nashville-based brokerage firm Heidke and
Co. “That’s when you make your money — when you have
a lot of people who are afraid to get into a certain area.”
Heidke’s firm owns shares in about 20 companies, and
these were up on average by about 45 percent last year, he said.
Over-the-counter stocks are securities not traded on the
major exchanges, typically because the companies selling
the stock either can’t meet listing requirements or are still
raising money. They’re sometimes called “pink sheet stocks”
because many are listed daily in a National Quotation Bureau
publication called the Pink Sheets.
These stocks are considered riskier because they are not
as large or stable as shares on a major exchange. A company
listed in the Pink Sheets can be wiped out if a hurricane
hits its office, for example, or if there are safety
concerns about the one product the company sells. The
shares of such companies trade infrequently, increasing the
bid-ask spread. Also, research is more difficult to obtain
on the companies.
By contrast, companies listed in the Pink Sheets offer significant
room to grow. So when one pays off, it can pay off
royally. Also, the shares are sold at a discount when compared
to those shares of similar companies with comparable
financials, according to Heidke. Pink Sheet companies aren’t
required to adhere to Sarbanes-Oxley, Heidke said, and the
stock prices often come at about a 30 percent discount under
what they would be if their respective companies were on a
major exchange.
Numerous reputable companies are listed in the Pink
Sheets. For example, various community banks have gone
public in this way, Heidke said. In Nashville, Gene Sibbett,
CEO of new local record label, Nashville Records, Inc., recently
led the charge to take the company public through a reverse
merger with a Pink Sheet company. For Sibbett, listing
in the Pink Sheets was a strategic business move.
“It was just so difficult, today, to raise any money in the
private sector,” Sibbett said. “We wanted to do something to
attract major artists to the label.”
Nashville Records took its company public by acquiring
the shell of a Pink Sheet neuroscience company. Shares were
6 cents each when Nashville Records moved into the shell,
and were about the same at press time.
The City Paper does not endorse purchasing shares of
Nashville Records, or any other Pink Sheet, stock. But the
company is an example of the types of entities that do exist
outside the NASDAQ. Nashville Records this month announced
signing several major artists as well as a cross-country
retail distribution deal. An entertainment event involving
“tens of millions” of viewers is on the horizon for this summer,
Sibbett said.
Heidke said it’s important to work through brokers with a
knowledge of stocks and equities before purchasing any Pink
Sheet stocks. He also advises to invest only in companies
that are profitable, and to normally not pick a company with
a price/earnings ratio above 15.
And in the case of investments in small companies, the
adage, “diversify, diversify, diversify” is especially important.
“They’re riskier, so you need a package of them,”
Heidke said.
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