The Over-the-Counter Bull

Wall Street has a new bull. On the over-the-counter market, home of all the stocks not listed on regular exchanges, a new high was recorded last week for the third week in a row. Prices of unlisted industrial stocks rose to the highest point since the National Quotation Bureau began keeping figures in 1948. To the nation's 4,000 dealers in unlisted stocks, the rise was a cheering signal that investors are moving in force into the world's largest securities market, where prices are quoted daily on more than 5,000 stocks, more than are listed on all the U.S. exchanges together.

Risks & Rewards. The rising popularity of unlisted stocks (one in every three U.S. stockholders now owns at least one) is the more remarkable because the over-the-counter market has no central marketplace such as that of the New York Stock Exchange, permits no margin buying (although stocks can be pledged for bank loans much as they are pledged for margin). Over-the-counter stocks were long considered a risky no-man's-land for the amateur investor. But many investors have decided that the rewards are worth the risks.

Since the over-the-counter market is the birthplace of virtually every new company, investors feel that it gives them the chance to get stock in a growing company before it becomes big time. Dozens of growth stocks, such as Ampex Corp., Polaroid and Texas Instruments, showed their first spark on the over-the-counter market before moving on to the big exchanges. But the market is no mere kindergarten for growth and glamour. It also handles 95% of all Government bonds and most municipal bonds, accounts for almost all bank and insurance stocks, many corporate bonds and Canadian and foreign securities. In its ranks are found such well-known companies as Kaiser Steel, Eli Lilly, Dun & Bradstreet, Macmillan Co., Anheuser Busch, Dictaphone Corp., Weyerhaeuser Co. and TIME Inc.

Free & Easy. Why do companies stay on the over-the-counter market? For smaller companies, it is usually because they cannot meet the requirements set by listed markets. The New York Stock Exchange requires earnings of more than $1,000,000 a year after taxes, assets of more than $8,000,000, and at least 400,000 outstanding shares of common stock held by no less than 1,500 stockholders. Old or closely held family companies that could meet such requirements often stay on because they prefer not to issue the detailed financial reports required by the exchanges, or they have stocks that are only of local interest or so high-priced that orders are too infrequent to justify an exchange listing. Examples: Christiana Securities, at $15,000 a share, and Los Angeles Turf Club, at $70,000 a share.

Unlike listed stocks, which are usually funneled to a single post on the floor where one or a few specialists sell at prices determined by the market, over-the-counter stocks are bought and sold on a relatively free-and-easy basis. A single unlisted stock is often handled by more than a dozen different traders, who negotiate a price by dickering with each other and with brokers (who usually try several traders in search of the best price) on private lines crisscrossing the U.S. The trader's profit on a transaction is the difference between the stock's bid price (at which an investor offers to buy) and the asked price (at which an investor or broker will sell), usually a spread of 1 or 2 points; the broker adds a commission of up to 5%. To get the range of nation-wide prices, brokers and traders receive a daily pink sheet of quotations issued by the National Quotation Board.

Walk Carefully. This informally conducted market can be shockingly volatile. Many a stock has gone from 5 to 50 in a short period, and gone right back to 5. The chief reason is that many unlisted stocks are in small companies with comparatively few shares outstanding. A tightly held stock can easily move several points in either direction by the transfer of only a few hundred shares. New Orleans' Kalvar Corp., with only 75,000 shares outstanding at the time, shot from $20 to $600 in four years on the strength of a new copying process using a Kalvar film--though the company has never earned a penny. The stock of E. L. Bruce sold at 15 to 20 for years on the American Stock Exchange until a fight for control forced the exchange to delist it because there was not enough stock to supply traders, notably those who had sold the stock short. On the over-the-counter market, the stock quickly shot up to 190 as the short sellers were forced to buy stock to cover their sales. Then it dropped back again to 35.

The National Association of Securities Dealers, to which all reputable over-the-counter dealers belong, polices ethics and standardizes procedures in order to give some discipline to the over-the-counter market. But there is one big difference to the stock buyer between dealing in unlisted and listed stocks. Each stock on an exchange has a specialist who is required to keep the market in his stock orderly, hopefully holding the stock's movement to a point or fractions of a point at a time. The dealers who make the market in over-the-counter stocks are not obliged to sell at any given price, can charge as much as the market will bear. The result is that the price of an unlisted stock can jump 5 or 10 points while an investor is deciding to buy it. Thus, the new investor in unlisted stocks has to tread carefully if he expects to have any success in the free-and-easy world of over-the-counter.

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