Day trading is, at its core, a risky venture. There is nothing gained if nothing is risked. That is a familiar credo that many day traders could live by. But controlled, managed risk is the name of the game. There is no honor in losing your nest egg in the first 6 months of trading. What you want to be able to do is know the risk of each and every trade that you plan to execute, before you even do it. That is why new day traders would do well to avoid OTC markets when they first get into the game.
OTC markets refer to over the counter exchanges, where small cap stocks are bought and sold. The larger exchanges are mainly concerned with larger stocks that have a higher per share price. The smaller companies that are trading on the OTC markets do not have the same financial disclosure requirements that companies on the New York Stock Exchange or NasDaq have to abide by.
New traders should do their due diligence on OTC markets. And then avoid them as they are getting their feet wet. There is not a lot of upside in these markets for traders that are wet behind the ears. There are a lot of pitfalls and ways for a trader to get in trouble.
The most likely thing that you could fall for in OTC markets is the pump and dump scam. That is where larger company or hedge fund buys a smaller company and then engages in a promotional campaign to pump up the stock price. When that larger company owns a bunch of the smaller corporation’s shares, it will benefit from the share price rising. It will use sympathetic members of the financial media to hype the smaller firm so that the market jumps on the bandwagon.
This works on less regulated exchanges, because there is less emphasis on financial disclosure for these companies. They have less stringent reporting requirements. So it is easier to pump up the hype without having to back it up. Once the market buys in and the share price jumps, the larger entity behind it all dumps all their stock and makes a healthy profit. The damage done to inexperienced investors can be devastating.
So the answer is to tread lightly in these markets, until you can make sure that you have a decent grasp on how to manage your risk. Being able to unload an asset quickly and efficiently is vital to being a good trader. There is nothing worse than being stuck with a rapidly declining stock with no way to unload it. That is the result of being caught up in a pump and dump.
Years of screen time and experience will allow you to avoid those scams and make a profit in these types of exchanges. But when you are cutting your teeth, you want to avoid the smaller cap stocks. The benefits of waiting will be worth it.