News flash: Penny stocks are risky.
Ok, that’s not news. If you trade penny stocks, you know they’re incredibly risky and the OTC world is more or less the wild wild west of the stock market. Almost anything goes and there are countless ways to lose your money. Even a savvy veteran is susceptible to massive losses with one slip up or unfortunate twist of fate but if you’re a green rookie then get ready to earn your stripes, everyone has to pay their dues.
When buying a stock, the maximum risk you’re looking at is a 100% loss – ie you lose everything you put in. It’s a devastating prospect to consider but on the bright side you always know precisely what the worst case scenario is – whereas something like short selling has a theoretically infinite amount of risk. With that being said, you obviously want to do everything humanly possible to avoid ever having to deal with anything close to a 100% loss, and the first thing you can do to drastically improve your odds is avoid ever touching stocks that are delinquent in filing with the SEC.
If a stock is a registered filer with the SEC, it’s obligated to file it’s quarterly and annual financial reports with them. If it falls behind a certain amount, the company becomes delinquent and is warned that they’ll have a window of time to get caught up to date. If the window of time elapses without action from the company the SEC can suspend the stock for a short period of time, then it’ll resume trading upon the grey market with no market makers making a market. At this stage you’ve likely lost upwards of 90% to 99%.. if you can even find a buyer. After a period of time the SEC can and likely will revoke the stock’s registration and at that point your loss is absolute.
So how do help protect yourself? Just go to OTCMarkets.com and check the status of the stock in question. Ideally the information you find doesn’t look like this:
This example is what you’ll see when you find a stock that is registered with the SEC but is delinquent with their filings. If you want to dig deeper and discover just how behind they are, visit SEC.gov and look up the company name instead of the stock ticker. Based upon personal experience, it seems that the 2 year delinquent mark is the threshold where the chances of a suspension increase significantly. With that being said, I would stay away (or part ways) with any stock didn’t handle a delinquency notice ASAP.
If you see that a stock is delinquent with the SEC, there’s a huge cloud of risk hovering over your head every second that you’re holding it. Why bother adding so much additional risk to any already risky venture?
The examples below are all different in many regards but the common link is none of them are risks of being suspended by the SEC (and ultimately revoked).
This is an ideal example of what you’d like to see. Companies that trade on the OTCQB and OTCQX all have to file their financials with the SEC and since it doesn’t say they’re delinquent, you can assume they are current.
Pink current implies that a company files their financial statements with the OTC and that they are current. They may additionally file with the SEC but this status only implies they trade on the Pink Sheets and are current in their filings with the OTC.
This final example is a company that provides no financial information whatsoever, not with the SEC or the OTC. The dark or defunct status implies that they are not registered with the SEC (as does the lack of delinquency notice). Whether or not you want to invest in or trade a stock with no financial information available is another topic, but the fact remains this stock isn’t at risk for an SEC suspension.
Over the years I’ve been caught in at least 3 stocks that got suspended before I finally connected the dots and figured out what to look out for. It’s a little embarrassing it took me this long to figure out something so simple, but I excel at learning things the hard way. Let my struggles save you from experiencing the harsh reality of booting up your software one morning only to find the bid and ask completely empty on the level II quotes on a stock you’re especially heavily invested in.
It’s ridiculously simple to prevent, go to OTCMarkets.com and make sure you don’t see a delinquent status, and if you do stay away. If I learned this earlier in my trading career I could have saved myself at least a few very costly lessons, but then again in that universe I’m probably not motivated to write this article. ¯\_(ツ)_/¯