When beginner investors start their careers, they often focus on things like mainstream stocks. The reason why is that these types of investments remain some of the most popular alternatives across all markets and as a result are the best understood and most widely available. Besides, they constitute the largest portion in the field of passive income. Just consider the sheer volume of trading that takes place on the New York Stock Exchange every day, for instance.
In order to find increased returns on investment you will often have to step outside of the comfort zone and find opportunities that may provide additional returns in exchange for increased risk. Doing so with nothing but large cap stocks is going to be more difficult. Thus, you should consider exploring additional investment strategies that have created innumerable millionaires over the past decades.
Venture Capital Through Shares
According to Investopedia, venture capital is slowly becoming one of the more popular choices for investors who do not mind taking on risk for a chance of realizing above-average returns. The way that it works is based on providing start-up ventures with capital that they need to develop, optimize, and grow their companies. For example, if a new organization in some sphere of manufacturing is starting, they will usually need a lot of capital that can go toward the construction of their facilities and purchase of the necessary equipment.
As an investment banker, you can use your funds to purchase the equity of such organizations in exchange for a fixed price. One of the easiest ways to do so is through something called “over-the-counter” stocks. Unlike their large counterparts, these stocks are sold by companies that are not big enough to make it to the large exchange markets. So, they are commonly seen with start-up corporations that have not been able to organize enormous initial public offerings. Expectedly, the price that you will pay for them is a lot lower when compared to the typical cost of stocks sold at huge venues, and they will could be more complicated to buy or sell.
Over-the-Counter Stocks: Basics
According to the President of a private equity firm called Sunny Isles Capital, LLC, Charles Vaccaro, there is a reason why over the counter, or OTC, securities remain such a popular choice for many investors. Their ability to provide enormous gains to those who can tolerate risk is unmatched. Given their low-trading price, which is usually counted in pennies, even a drop of few cents could translate to a 50% drop in value. Fortunately, this also means that a minor increase could result in hefty gains for individuals who are not afraid to buy OTC stocks in bulk.
Sunny Isles Capital is a direct investor using their own money taking the ultimate risk.
Purchasing in Bulk
Since OTC stocks are sold for prices that are far below the average costs of most other investments, you will often need to invest in bulk in order to make the gains worthwhile. For example, if there is a start-up venture that is offering penny stocks for 10 cents a share, you would need to buy 10,000 shares to have a $1,000 portfolio value of that particular asset. This can be a great way to build wealth without needing enormous returns. For example, if there is just a one-cent increase in the stock price, you will immediately see the portfolio spike to a value of $1,100. If you attempted to do the same with a stock that costs $5, per se, a one-cent increase in value on a $1,000 investment would be negligible.
Purchasing Stock in the Market vs Direct Investing with the Issuer
Charles Vaccaro explains that when an investor purchases stock in the open market their hope is that the company will grow and the share price will increase. Their purchase of stock did not help the company what so ever, it was strictly a trade or transfer of shares amongst two investors. One believing it is time to sell and the other who believes it is time to buy.
Charles Vaccaro continues to explain that when Sunny Isles Capital purchases OTC stocks, they do so directly from the issuer and their investment is often a significant factor in the success of that company due to their smaller size and immediate capital needs. Investing directly into to the issuer is a way to reduce risk. When investing directly with the issuer, Sunny Isles Capital receives a convertible note or convertible preferred shares that convert at a discounted price to the current market at the time of conversion. This again helps reduce risk. The idea with these strategies is that the capital investment will help in the success of the company in which they’re investing.
While these strategies are still considered risky, the potential upside more than makes up for the risk, though they can only be successful through sizeable investments, usually twenty-five thousand dollars and up. Charles Vaccaro continues and explains that this type of investing is not limited to professionals. Any individual can call up any of the companies listed on the OTC exchange and offer to supply capital on these terms. The holding period required before one can sell their shares will vary from six months to one year depending on if the issuer is a fully reporting company or not. Charles likes to call it the “unfair advantage that is available to everyone.”
Combine Multiple Strategies
You should never invest funds into a single type of OTC stock. Doing so means that you are taking an unnecessary amount of portfolio risk. Hence why the concept of asset diversification remains one of the most important strategies in investing.
Since you will not find these assets on the larger stock exchanges, you may need to spend some additional time finding the right person to execute the buying and the selling process. Finally, purchase a wide variety of OTC stocks accompanied by a plethora of alternative investments into things like government bonds, real estate, equity-based venture capital, and similar. That way, the risk of losing a major portion of your portfolio will be spread across numerous industries and asset types, which will minimize it.