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Case Studies in Finance |
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Having just made senior partner in his Hawaii based architectural firm, Matt Gilbertson sought to invest a substantial portion of his new, much higher salary in speculative grade stock. Normally in the habit of deleting mass e-mail, Matt's attention was drawn to the subject line: "Bulletin Board Trading Now Available," that was sent by TD Waterhouse. TD Waterhouse is a brokerage firm that allows investors to trade for only $9.95 per transaction up to 2,500 shares of a single stock. This emerging trend of do-it-yourself investing (at a much lower commission cost) was attractive to Matt. However, since Matt did not know what a Bulletin Board Stock was, he carefully read the e-mail to learn more about them.
Bulletin Board stocks are recommended for investors at the high end of the risk-return spectrum. There are several sources of risk associated with these securities. OTCBB stocks are not required to meet minimum listing and reporting requirements as are stocks listed on organized exchanges, such as the New York Stock Exchange (NYSE) or the American Stock Exchange (ASE or AMEX). This means that investors will find it more difficult to find publicly available information and news that affects the value of the firm. Moreover, since national exchanges have stringent listing requirements, OTCBB stocks tend to be less stable companies with short track records, possibly facing regulatory actions or maybe even bankruptcy.
Another concern with OTCBB stocks is that because of low volume or liquidity, they have dramatically higher bid-ask spreads and are subject to partial order executions and in some cases unfilled orders. Finally, automation, which so many investors have become accustomed to in recent years, is not available in the OTCBB. For all these reasons, OTCBB stock investing opportunities are being presented by TD Waterhouse with a warning label that investors should do their homework, not only about the firm itself, but on this risky marketplace as well.
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