Investing in Penny Stocks can make for a wild ride. It can be hugely rewarding but it is also immensely risky.

Also constant vigilance is necessary to avoid falling prey to fraud. Trading Penny Stocks is not for the faint of heart.

Penny stocks are common stocks that trades for less than five dollars. In fact, many of them are traded for mere pennies and even less per share.

Many institutions disallow trading in stocks that are below $5 in price. As a result, this contributes to a lack of liquidity which adds to the volatility of those Stocks.

Ordinarily, Penny Stocks are not traded on the regular exchanges - NYSE, NASDAQ, or AMEX - and are not subject to the same regulatory or reporting requirements as stocks traded on those exchanges.

However, it is important to note a particular distinction to the statement above. Many sub $5 dollar stocks do trade on the regular exchanges and are subject to the rigorous regulatory and reporting requirements of those exchanges as are all stocks traded on those exchanges.

Also if a stock trades below $1 on the regular exchanges for too long, they run the risk of been de-listed from those exchanges and would have to re-list on the Over The Counter (OTC) Bulletin Board or the Pink Sheets.

True Penny Stocks are traded through quotation services such as the Bulletin Board or the Pink Sheets (recognizable with a .PK suffix) .

The Attraction Of Penny Stocks To Many Investors

• A small amount of money can control a large amount of stocks
• The low price and potential for rapid growth
• Because of the low stock prices, even small moves can result in huge percent profits
• Even though some Penny Stocks are thinly traded, others volume can reach several hundreds of millions of shares traded per day because of their cheap price.

Despite the fact that there is an obvious appeal for the potential of rapid and astronomical profit from trading penny stocks, there is a not so attractive side to consider. A large percentage of stocks listed on the Pink Sheets or the OTCBB are manipulated and traded fraudulently, so Buyers Beware.

Disadvantages Of Penny Stocks

Listed below are some of the risks involved including causes of manipulation

• Lack of liquidity can cause huge volatility and also sometimes make it difficult to enter or exit a position.
• Lack of regulatory requirements and no minimum accounting standards make penny stocks much more vulnerable to manipulation and fraud.
• Pump and Dump schemes in thinly traded companies: Crooked traders buy the stocks low then tout the stock on bulletin boards, chat rooms, or other means as the latest "hot" stock. As a result, they get others to run up the stock price - then they dump their own shares at huge profits.

  Finally, trading in penny stocks is not for everyone. It can be hugely rewarding but it is also immensely risky. Before diving in, examine your tolerance for risk thoroughly.

  Should you decide that you have the intestinal fortitude to engage in it, commit only a small amount of your available investment funds to it, at least until you know what you are doing.

  

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