Well, it’s been a few weeks, so I feel the need to take another painful visit to the penny stock mailbag. Previous episodes include how to find 14,849% (or go bankrupt) and why low volume trumps everything else.
This time, Debra writes: “RE: Save the World Air (OTC:ZERO)? Is this a scam or does this have real potential? I’ve invested a lot of money over the last 6 years and, well, nothing but lots of hype. What do you know if anything?”
For starters, any stock that revs up the hype machine so much to claim they are going to “save the world” in their own company name immediately sets off warning bells.
But here’s what I know, in various levels of detail, depending on how curious you are:
The one-sentence answer:
This might be an actual company, but for investors, it’s as good as a scam — so get out.
The one-paragraph answer:
Save the World Air is a microcap stock (also known as a penny stock in the pejorative sense, even if it trades for more than a penny) that trades over-the-counter instead of on a major exchange and suffers painfully thin volume. In my experience, 90% of OTC investments are a joke — and 100% of all investments with a market cap of under $100 million are perilously risky. These investments are nothing but all-out gambles and are no different than a casino. If you like the thrill of putting “a lot of money” on the roulette wheel and letting a bouncing ball decide your fate, then by all means stick it out with ZERO. But if you can’t afford to lose all your money — which you very well might — get out of this stock.
The detailed answer about OTC requirements and the risks of low volume:
What does it mean for a stock to trade over-the-counter or on the “pink sheets”? Well, it means that a stock is not a member of a respected exchange like the NYSE or Nasdaq that demands universal accountability for listing in the form of a minimum share price and regular reporting. The OTC and pink sheet arena is the Wild West of the stock market, where you don’t have as much information at your disposal.
Considering that publicly traded stocks like Enron had no problem cooking the books — or that companies like AIG (NYSE:AIG) had no problem hiding their true risks until it was too late — that should strike fear into the heart of any investor who is trying to analyze a company based on fact and not fiction.
To be sure, there are some decent pink sheet stocks out there that just don’t care to follow U.S. exchange rules. But typically, they are listed elsewhere in the world. Take Switzerland’s Nestle (PINK:NSRGY) or Germany’s Volkswagen (PINK:VLKAY) or Japan’s Nintendo (PINK:NTDOY). They follow the reporting and disclosure requirements of their home markets — which just so happen to be as stringent (or perhaps more so) than stocks listed on the NYSE.
That’s why I say just 90% of companies listed off a major exchange are bunk. There are indeed outliers.
So how do you know when you have a decent stock or a risky gamble? Simple: Size matters, especially regarding volume.
Consider that your microcap Save the World Air trades only 100,000 shares or so daily and is crazy volatile at 40 cents a share, and you’ll quickly come to understand that this stock doesn’t trade based on any facts or fundamentals 99% of the time. It swings based on volume. After all, a $10,000 order represents 25% of all shares that are traded on a typical day. It’s easy to see how one buyer or seller can tip the scales on ZERO stock prices without much effort. (If this is a bit hazy, read more about volume here.)