For penny stock investors, it’s important to understand the distinction between the Nasdaq and the OTCBB. Over The Counter Market companies do not have filing standards. Conversely, there are very strict qualifications for a company to list its stock on the Nasdaq. The OTC allows any company that files its financial statements to trade on its market.
The Nasdaq requires a company to meet certain asset and revenue criteria while an OTC company may not even have assets or revenues at all. If a Nasdaq company falls on hard times, more often than not they are removed from the Nasdaq due to their inability to meet the listing requirements. They could have had a significant decline in assets and revenues or may be close to bankruptcy proceedings. Also, once a stock drops below a certain share price and stays there for an extended period of time, they are removed from Nasdaq and placed on the OTC to resume trading.
Now, if a company’s stock is dropped to the OTC, this doesn’t necessarily mean death for the company. In fact, alert investors find some of the best penny stocks this way. Often companies get a second chance to find a solution to the financial dilemma, so the savvy low-priced stock investor can create a penny stocks to watch list that could result in finding a real undervalued stock.
Finally, the most important difference between the Nasdaq and OTC Market is that the OTC does not provide automated trade executions. Instead, it is up to the Market Maker to decide if he wants to buy the stock. A Market Maker is simply a dealer that buys and sells shares of a stock. They have the luxury of waiting and watching the direction of the market before they decide to buy [or not]. And so do you!
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