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Selling Pink Sheet Stocks
Let's turn our attention to selling these stocks now that we have talked about buying OTCBB and Pink Sheet stocks. The market sell order can lead to trouble like a market buy order. If you show that you are prepared to sell at the market rate, the market makers may perhaps quickly drop the bid previous to filling your order. Placing such a frivolous order may possibly not only cause problems for you, it can also cause problems for everybody else too. Here is a little story for you that talks about a crazy day of trading for one particular pink sheet stock. The stock in question is International Power Group (Pink Sheets: IPWG). Now, as you will soon discover, I love to trade this stock. You can get more information about IPWG in the substitute energy segment of the section titled Sectors Poised for Profit.
We will start this story off by saying that we are speculating about what happened on this particular day. Nobody can ever be sure of exactly what occurs during a trading day. You can not gather all of the stock's market makers in a single room and cross-examine them on the day's activities. So, we will begin our story. One beautiful October day, IPWG was flying high; it was enjoying a two week run of continuous gains. The morning was moving ahead just like every other morning of the earlier two weeks as new fifty two week highs were being set everywhere. Suddenly, like a heavy black cloud ruining a beautiful day, an inconsiderate investor placed a market sell order. Our guess is that this guy was an uninformed newbie who was ready to cash in on the huge gains produced by the latest two week run. At around midday, the market sell order hit the wire and the market makers quickly dropped the bid in an effort to get hold of this guy's shares at really cheap prices. This transaction led to an inopportune series of events that cost investors a big amount of money. As the bid quickly fell to fill the open market order, open stop-loss orders were triggered and this resulted in additional selling. This sales wave created a small dread among investors and weak hands started to bail out of their positions. When the smoke had cleared at the end of the trading day, the previously mighty stock that was setting new fifty two week highs earlier in the day had declined by nearly 50%. A 50% drop in price on a day with no negative news or SEC filing activity. Such a precipitous drop would be to no purpose on the larger exchanges, but it is not unusual for a Pink Sheet stock.
We must say that we were to blame to a certain extent for the activity on that particular day. We were some of the investors that had an open stop-loss order. It is highly advisable to place a stop-loss order on your microcap investments unless you have the luxury of watching your stocks all day. A stop-loss order will guard you from unexpected drops in the price of a stock. But you have got to be careful when placing a stop-loss order. There is a good chance that the stock's normal intraday trading activity will trigger your open order and cause the sale of your stock if you set the stop-loss order at a value that is too close to the current price of the stock. We ended up with a nice profit on the sale of our stock by the time that our stop-loss order filled. We watched the rest of the day's activity and feverishly determined a re-entry price to get back into the stock before we took the time to count our money. We were banking on the fact that this uncorroborated price reduction would promptly be followed by a rebound. We placed a limit buy order at a price that was somewhat lower than what the market makers were prepared to fill. On the following morning, we had to fiddle with our purchase price, but we eventually reacquired my shares for a significant discount. The day after the tanking was indeed a rebound day as the stock finished up 33% by the close as we had anticipated. These two crazy days underscore the extreme volatility of OTCBB and Pink Sheet "stocks. Prices move quickly on these markets and you could be in for a big surprise if you are not paying attention.
You must be asking yourself if these circumstances are really possible. Can a few sell orders trigger such a sell-off? Well, first of all, we will clarify things by saying that an event like this is not very possible to occur on the larger exchanges. An event such as this can only happen with thinly traded stocks, typical of many securities that are found on the OTCBB and Pink Sheets. Stocks with heavy daily volume have the capability to absorb such orders without them having much effect on trading activity. Thinly traded stocks on the other hand, may go a complete day with only a small number of trades. When a stock has minimum trading activity, a small number of sell orders can do a lot of harm!