People always ask me what I think the biggest risk in the OTC market is.
That’s an easy answer.
The aggressive seller.
What do I mean by that and how do you look for this?
An aggressive seller is usually someone with a large block of stock that they received for little to no cost or at a deep discount to the current market.
These sellers are usually original shareholders who put the company together, attorneys and consultants who put the company together, Individuals that may have sold assets to the company, debt holders that agree to convert debt for equity, or funding sources that cut a deal to purchase stock at a discount to the market in exchange for giving the company the cash they need.
Because these people own shares at very cheap prices they sometimes do not care what price they get for their shares.
Some times these people are just not market savvy and when they see a stock they own become active they just hit the sell button over and over driving the stock lower instead of using limit orders on the offer or selling their shares in small amounts so they do not knock the stock down.
How do you know if there is an aggressive seller in the mix?
Well the easiest way to see this is to look at the average daily volume in a stock, see how much volume is in the stock the day you are trading it, and watching the price.
For example, if you are watching a stock that has an average daily volume of 50,000 shares trading at 50 cents a share and you see the stock is trading 250,000 shares and the price is not moving higher you can assume there is a aggressive seller in the mix.
When trading OTC stocks you need to always be on the look out for this. When you see this happen it is usually best to get out of the trade. Often times these sellers will just get more agressive as the day goes on.
I always suggest you pay very close attention to the first 15 minutes of each trading day. If you see heavy volume and the stock is not moving higher GET OUT. Don’t think, don’t hope just get out. I promise you this will save you a boat load of money if you do.