Penny stocks are low-priced stocks or securities that trade for less than $5 per share. Penny stocks are sold by smaller new companies (companies with a market capitalization of less than £100 million). They offer these stocks because companies are seeking money for commencement, basic operations and expansion of business.

Penny stocks are not traded on a stock exchange market but are traded “Over the Counter” (OTC) through quotation services such as Pink Sheets or the “Over the Counter Bulletin Board” (OTCBB).

Penny stocks allow an investor to buy a large number of shares with small amount of money. They can be traded for very little, which is often less than five dollars and sometimes even for a fraction of a cent. Penny stocks can easily be purchased online, through subscription services, and from the brokers who are specialized in these type of stocks.

Penny stocks are more risky than any other regular stocks. It is difficult for a beginner to invest in the stock market, who doesn’t have a background in stock trading and finance. When you purchase the stocks, chances are you may never see your initial money or your stock again. Many penny stock brokers have been blamed for fraudulent and dishonest business practices, which have made the investors lose their hard earned money. Obviously, not all the companies listed in Pink Sheets and OTCBB are fraudulent and dishonest.

Steps to invest in Penny Stocks:

1. Do extensive research about Penny Stocks and Penny Stocks brokerage firms through the internet, as many internet websites provide you with clear information on how to invest in penny stocks.
2. Know about Securities and Exchange Commission (SEC) rules such as:

• According to SEC rules, before a broker sells a penny stock to you, you must be approved for transaction from the firm and receive a written agreement for the transaction.
• The firm must provide you a document explaining the risks of investing in penny stocks.
• The firm must tell you the current market quotation for the penny stock along with the compensation details that the firm and its broker will receive for the trade.
• The firm must also send monthly account statements showing the market value of each penny stock held in your account.

Safety Guidelines

Here are few safety guidelines to help you protect your capital:

• Never purchase a stock that does not have attention.
• Ensure that the stock trades a minimum of 1 million shares per day over the past one month.
• Be sure to take a look at the chart of the penny stock in order to identify support and resistance levels, as brokers and brokerage firms often artificially increase the prices of penny stocks.
• Avoid following any tips from message boards and spam emails.
• Do not invest all your money in one trade only, use .5% of your total portfolio price for all of your penny stock trading activity. 

Benefits of Penny Stocks 

• It’s good for a beginner to invest in penny stocks first, and learn the trading strategies of the stock market, to prepare yourself to be an active player in the stock market.
• You can buy penny stocks for a few hundred dollars and turn them into a thousand dollars, just by getting the right information about the stock at the right time.

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