So you’ve decided to buy penny stocks to earn some cash.  But are you cut out for this speculative venture?  Have you conducted online research to know what you’re getting into when buying penny stocks?

It is wise to thoroughly seek out the risks and rewards of investing in penny stocks before jumping in.  There are tons of websites that provide information to help you make an informed buying decision.  Remember, an informed investor is a profitable investor (most of the time!)

Try not to be drawn into the excitement and tremendous returns of this type of investing without educating yourself before buying.  With the Internet so easily accessible, not doing your homework is not an excuse.  If you take the time to do it right, you can sidestep the easily avoidable dangers and be well rewarded.

There is no set definition but penny stocks are essentially common stocks that trade under $5 a share.  These shares are generally considered to be speculative due to their low liquidity, small capitalization, insignificant operating history, and limited disclosure requirements.  Though some big household companies used to be penny stocks, the majority of companies disappear before making it. Understanding that penny stocks are riskier than regular stocks is important to avoid losses while chasing the prospect of huge profits.  These stocks tend to fluctuate excessively and have been known to earn exponential gains or losses within a matter of hours or days.  This type of investment is certainly high risk, high reward.

The process of buying penny stocks is similar to that of regular stocks, except that penny shares trade on different market exchanges:  pink sheets or over-the-counter-bulletin-board.

You want to find a broker you trust that will deal with penny stocks because some brokers won’t.  The key is that the broker is trustworthy because there are crooked brokers out there.  The broker acts as your agent and will buy and sell shares upon your request.  Full service penny stock brokers can be a resource and recommend stocks based on their research.  Make sure you understand what you are buying before accepting any recommendations!  For their service, the broker may earn a commission each time you buy or sell shares.  Or they earn a cut from the spread, the difference between the bid and ask price.  Shop around to get the best deal that meets your trading strategy.

Alternatively, you could set up an online brokerage account and buy and sell penny stocks yourself.  There are various competitive online brokerages available so find one that suits your needs.  Ensure that your chosen brokerage accepts trades on the pink sheets and over-the-counter-bulletin-board.  If you opt for the do-it-yourself approach, it is especially important that you acquire the knowledge necessary to engage in successful penny stock trading techniques.

As an individual investor, it is possible for you to do your own research and execute your own trades on the internet. There are tons of information on investment related websites and online financial press for you to devour at your convenience. Though it may be difficult to find good information on penny stock companies due to their limited disclosure requirements, it is essential that you find out as much as you can.

The truth is most penny stocks have neither profits nor revenues so what should you look for? Here are a few general factors to take into account when picking potential good penny stocks:

• stocks should be trading at a minimum average daily volume of 100,000 shares to ensure adequate liquidity

• stocks’ share price should be trending upwards – analyze chart patterns

• understand the company’s business model – how it makes money and plans to grow; if it’s currently not making money, how long until profitability?

• understand the company’s product – is it unique and in demand?

• be aware of consumer and industry trends because changes in trends can crush even the best companies

• always use a stop loss to exit the investment

To make money in this investing game, you need to gain a full understanding of the penny stock market.  Scammers are known to prey on unwary investors through “pump and dump” schemes and offshore schemes.  Though diligent research will not always guarantee that you pick winners each and every time, resorting to flipping a coin to select your next investment is a comparable alternative.  Hence, do your research but don’t invest your life’s savings into buying penny stocks.