(October 31) – “Feeling lucky? You may need good fortune if you invest in the lesser-known stocks that trade on the OTC Bulletin Board,” writes Arron Elstein in today’s WSJ.COM
“Bulletin Board stocks collectively underperform those trading on the New York Stock Exchange or Nasdaq Stock Market, according to a recent study that tracked bulletin-board issues from 1995 to 1998. During that period, when the stock market scored some of its best years, Bulletin Board shares on average declined three out of the four years and consistently fared worse than other, more established stocks, according to the study.”
“The OTC Bulletin Board is run by the National Association of Securities Dealers, also parent of the Nasdaq Stock Market, and lists about 3,500 companies. But it differs from the Nasdaq and other exchanges in that it doesn’t have stringent listing requirements, for instance, mandating that companies be of a certain size and have a minimum number of a shareholders. While many reputable small companies can be found on the Bulletin Board, the market’s lack of regulation also attracts some of the investment world’s more dubious characters.”
“So even though the market for Bulletin Board stocks is 10 times larger than it was five years ago, beware before you invest, says Carl Luft, an associate professor of finance at DePaul University in Chicago. The study, conducted along with Lawrence Levine, a director for corporate-finance services with American Express Co., and Scott Larson, a research analyst with Allstate Corp.”
” ‘Our research shows how risky this form of investing is compared to other areas,’ Mr. Luft says. ‘These stocks are highly volatile, in part because of liquidity and trading volume in individuals stocks tends to be low. Also, there is very little third-party research about these stocks.’ “
“Despite the red flags, bulletin-board stocks are more popular than ever. Individual investors hope their panning for the next hot stock will produce a diamond in the rough. More than 100 million shares in companies quoted on the Bulletin Board were traded through September, compared with only 10 million in all of 1995, according to the NASD. But while a record number of shares have changed hands this year, Bulletin Board activity has slowed greatly since its March peak of 25.1 million shares.”
“Securities regulators say the Internet has made it easier than ever for speculative-minded investors to learn about the obscure companies that trade there. On online message-board companies such as Raging Bull (www.ragingbull.com), participants post tens of thousands of messages every day extolling and criticizing Bulletin Board stocks.”
“But investing in Bulletin Board stocks is fraught with risk. Until last year, the companies that traded there weren’t required to disclose any financial information to the public. This meant investors in bulletin-board companies could only guess whether the companies had the means to achieve their stated objectives. The paucity of verifiable information made the stocks easy prey for unscrupulous promoters who would buy the stocks for pennies a share, pump them up on message boards, then sell their shares at inflated prices.”