Keen to turn pennies into dollars, novice traders are lured into investing in penny stocks with dreams of making easy money using little capital.  These same dreams have a high probability of turning into nightmares as penny stock investing is a speculative venture prone to generating quick losses.  Here are 3 tips to help reduce the risks inherent in one of the riskiest stock investment opportunities.

1. Educate and learn diligently.

This point cannot be emphasized enough. Diligently research reputable internet websites that can educate you about penny stock trading and how the market works. Familiarize yourself with the language of penny stock investing and understand the application of fundamental and technical analysis.  Determine whether you would benefit from the services of penny stock brokers or would be better off doing everything yourself. Learn what to look for when buying penny stocks. Seek out sites that offer trading simulation software, also known as paper trading. Paper trading enables you to participate in the market and gain practical hands on experience investing in penny stocks without wagering real money. This means that you will still have the shirt on your back should your experience take a dive. It also means that should you amass huge paper gains, you will have more confidence in your stock picks to begin live investing. Other sources of learning include investment information in a variety of newspaper publications, periodicals and magazines as well as buying stock trading courses and systems. Again, seek out reputable sources to ensure that you are getting a quality education. Do your homework, research and analysis before you purchase a stock. To increase your success in investing in penny stocks, you need to equip yourself with sound knowledge to make wise investing decisions. Remember that the more you learn, the more you earn.

2. Understand Trading Volumes

Penny stocks are known to have low liquidity. Hence, liquidity is an important aspect when researching potential companies to invest in. Good penny stocks should have a consistent high volume of shares being traded daily. Just reviewing the average volume can be misleading. You need a steady trading volume in order to get in and out of a stock position at an acceptable rate of return. If the volume is low, stay away or else you will end up holding "dead money”. It is not worth it.

3. Have an entry and exit strategy before proceeding.

Do you have a plan before you buy? Make sure you have one. Be clear on your reasons for buying. Do you have an exit strategy? Do you know your stop loss target? When will you take profit? Be sure to write down these answers before you place your buy order. Remember that penny stocks are highly volatile. It is normal for them to move up and down quickly on a daily basis for various reasons. Despite how cautious you are, know that you will profit from some trades and lose on others. Having a plan helps to keep your emotions in check. Commit to your strategy.

Investing in penny stocks is not for everyone. There is a lot of information available online. Be prepared to acquire the knowledge and understand how the market works so that you can make an informed decision. You can make a lot of money or you can also lose a lot of money. It's up to you.