Make Money In Stocks

Investing in the stock market is a lot of fun but it also takes a lot of skill. Investing in the over the counter stock market is another beast entirely! Over the counter stocks are generally companies that are much much smaller than a regular publicly traded company on the NASDAQ or the New York Stock Exchange. These companies are very thinly traded, meaning you may not be able to buy or sell the quantity you want on any given day.

Because of this, large sways in prices, both up and down can be completely normal and if you aren’t willing or able to handle the psychological effect this may have on you, you’ve got to seriously reconsider investing in this market. But if you think this is the place for you, I’ve got a few tips to help you evaluate over the counter stocks and I’m going to share them with you in this article today.

First of all, the growth potential of the company is the most important consideration you will ever have, single-handedly. The earnings increases for the company should be at least 10% a year on average for the past six years or else you should stay away from the issue.

Next look at the cash, investments, and accounts receivable as well as the materials and inventories for the company. These things should normally be at least twice the size of the liabilities that are due within the next year for the company. This is because smaller companies need a larger cushion to weather all storms.

Next take a look at working capital per share. For over the counter companies the working capital per share should be larger than the market value of the stock. For instance, a $12 stock should be backed by a good solid $14 per share in working capital; at least.

Next, the company should be owned by at least 10 institutional investors as reported in the S&P Stock guide. This may be hard for many OTC stocks but it is important nonetheless.

Next look at the balance sheet for the company. It shouldn’t show any deferred operating expenses at all.

Next look at who also owns the stock. You want to look for public ownership that is between 500,000 and 1 million shares of stock. A good indicator is that no more than 10% of the company is controlled by a single individual or institution.

Next look at recent dividends or at recent stock splits. What happened after the dividends were issued? Did the price of the stock continued to increase or did it drop? Increase suggests that the company is financially solid and it’s investors feel strongly about it. A decrease suggests that insiders are cashing out and running away… which is a horrible sign and a clear indicator to stay away.

Finding a good over the counter stock can be a lot of work but at the same time it can be incredibly rewarding because all it takes is a few of these gems to be uncovered in order to make you a lot of money very quickly!

The Capital asset pricing model provides an alternative approach for the calculation of the cost of equity. As per the Capital asset pricing model, the required rate of return on equity is given is given by the following relationship:

Cost of equity = the risk free rate + (The market risk premium) the beta of the firms share

Above equation requires the following three parameters to estimate a firms cost of equity:

1. The risk free rate

2. The market risk premium

3. The beta of the firms share

(1). the risk free rate

The yields on the government treasury securities are used as the risk-free rate. You can use returns either on the short term or the long term treasury securities. It is a common practice to use the return on the short term treasury bills as the risk free rate. Since investments are long term decisions, many analysts prefer to use yields on long term government bonds as the risk free rate. You should always use the current risk free rate rather than the historical average.

(2). the market risk premium

The market risk premium is measured as the difference between the long term, historical arithmetic average of market return and the risk free rate. Some people use a market risk premium based on returns of the most recent years. This is not a correct procedure since the possibility of measurement errors and variability in the short term, recent data is higher. As we explained in our previous posts the variability (standard deviation) of the estimate of the market risk premium will reduce when you use long serious of market returns and risk free rates.

(3). the beta of the firms share

Beta is the systematic risk of an ordinary share in relation to the market. In our previous posts, we have explained the regression methodology for calculating beta for an ordinary share. The share returns are regressed to the market returns to estimate beta.

Capital Asset Pricing Model VS Dividend Growth Model

The dividend growth model approach limited application in practice because of its two assumptions.

1. It assumes that the dividend per share will grow at a constant rate, g, forever

2. The expected dividend growth rate, g, should be less than the cost of equity, to arrive at the simple growth formula.

The growth formula is,

Cost of equity = (Dividend in year one / Prize in current year) + growth

These assumptions imply that the dividend growth approach cannot be applied to those companies, which are not paying any dividends, or whose dividend per share is growing at a rate higher than cost of equity, or whose dividend policies are highly volatile. The dividend growth model approach also fails to deal with risk directly. In contrast, the Capital asset pricing model has a wider application although it is based on restrictive assumptions. The only condition for its use is that the companies share is quoted on the stock exchange. Also, all variables in the Capital asset pricing model are market determined and expect the company specific share price data; they are common to all companies. The value of beta is determined in an objective manner by using sound statistical method. One practical problem with the use of beta, however, is that it does not probably remain stable over time.