According to SEC, any stock traded under $5 is classified as penny stock. Due to the nature of cheap price per share, investors could spend much less money to acquire thousands of shares compared to higher priced stocks. This might be the primary reason why small investors took a flier into penny stock market, with the illusion much shares of stock could make more money for them.

The higher leverage associated with penny stock is a double-edged sword though. If investors know what they are doing, it could work wonder for them. It’s possible to double or even triple their initial investments. If it’s the other way around, they could lose their initial investment in a lighting speed as well.

For investors who considering participate into penny stock market, their first question to ask is not Where to buy penny stock or how to buy penny stocks. Instead their top priority is to educate themselves, understand the risk associated with cheap penny stocks, watch out the common pitfalls, and safeguard their hard earned money.

• E-mail spam might be the most common pitfall of buying penny stocks. The scam masters sent out tens of thousands of this kind of e-mails to talk sweet about some penny stocks might explode in no time soon. While spammers laugh all the way to the bank, their naïve victims only found out the next super winner turned out to be a big money sucker. You might wonder how the scheme works. Well, I’m glad you asked. This trick is called pump-and-dump. Spammers unloaded their shares to victims on all the way up. The undertaken stocks usually took a nose dive when people stopped buying it. The spam might be spread around via newsletters, fax or phone calls. So watch out any this kind of unsolicited information.

• Another common pitfall is chasing hot penny stocks. Just because one stock is hot and in the news, or everybody is talking about it, doesn’t make it a legitimate reason of buying it. When a stock reached the spotlight of media, usually it’s close to end of the party. Buy the rumor and sell the news is the common Wall Street practice.

• Making investment decision based on tips. Lots of people are actively seeking this kind of information, and deem it as an effective way to invest their money. There is a quote from Reminiscences of a Stock Operator, “TIPS! How people want tips! They crave not only to get them but to give them. There is greed involved, and vanity. It is very amusing, at times, to watch really intelligent people fish for them. And the tip-giver need not hesitate about the quality, for the tip-seeker is not really after good tips, but any tip. If it makes good, fine! If it doesn't, better luck with the next.”

• Making investment decision without due diligence. Ironically though, people might spend more time to pick a plasma TV than make an investment decision. So why thrown away hard earned money blindly? Investors should never comprise their standards when come to buy penny stocks. To make sure pick only the best penny stock, it’s imperative to run a complete fundamental analysis, which indicates the company is in good shape, and the growth of the business model is sustainable. Then congratulations, your might find yourself a winner.

The good news is that all these pitfalls can be avoided when approaching penny stock market with great cautious and dedications. Actually these pitfalls are not limited to buying penny stock only. It can be applied to making any investment decision. For people looking forward to add penny stocks to their investment portfolio, they need to educate themselves first from fundamental analysis to technical analysis about how to pick good penny stock, collect and interpret related information without personal bias. Then there is no much difference between cheap penny stocks and the normal stock trading. Investors should make their own investment decision, and take full responsibility about their decisions.