Before you actually get yourself into Penny Stock Trading, it's very important that you know what a penny stock is. If you'll ask several investors, you'll get differents answers but the general defintion is a highly speculative stock trading for a relatively low price. In the US, some consider stocks that trade for less than a dollar as penny stocks, but there are also investors that already consider a stock as a penny stock if its trading for less than 5 dollars.

Penny stocks are often referred to by investors as nano, micro and small caps. In the United Kingdom, they usually call this penny shares but different laws apply. A penny share in the UK refers to a stock which is offered by small cap companies.

Just like in any other investments, penny stock trading can also be risky. Mainly because you don't have a way to see the history of the company or the shares unlike with larger companies that trade stocks for more than a dollar where you can access financial reports filed with the SEC.

Many investors are attracted to penny stock trading because of it's potential for rapid growth. It could be as high as several percents in few days which means easy money if you plan to cash it out but severe loss can also happen overnight so it's really a risk that you have to take. Another risk in penny stocks is lack of liquidity which makes selling a stock difficult, especially if there's no buyers that day.

Another thing that investors should be careful of is the penny stock fraud. This is usually done by illegal pump and dump schemes in small companies because it's easier to manipulate a stock since there's little financial information. What happens is that fraudster will hype a stock by featuring a press release about a new product and it's potential high profits. You'll usually this in companies' websites, bulletin board postings and in chat rooms. There are even times that you'll hear it from tv and radio analysts. They will urge you to buy the stock immediately and sell it before prices go down. When they get the investors to buy the stocks, which pumps up the price, they will sell their shares at the peak, that makes them money but investors who've been scammed of course will lose a lot of money when the value of the stock go down.

Penny stock scam is also in the internet. This is done by promoting penny stocks through spam emails. According to a recent study, 15% of email spam is related to penny stocks so be careful when doing transactions online.

So now that you now what a penny stock is and some of the risks that you should be avoiding, the next question would be where or how to trade penny stocks. Since penny stocks are not listed on the NASDAQ stock exchange or on a national secutiry exchange, they are traded in the over-the-counter market (OTCBB) and in the Pink Sheets. OTCBB is an electronic quotation system in the United States that displays real time quotes, volume information for over-the-counter equity securities and last-sale prices while Pink Sheets is an electronic quotation system operated by Pink OTC Markets.

An agent will usually act on the investor's behalf for the trading of most stock. An agent will be the one to arrange a transaction directly between the investor and a third party but of course the broker will receive a commission for doing the trade. Since you are paying the broker, you might as well ask them to find you a good investment but you also need to be careful because there are many brokers who are just trying to make a sale and may not really have the investor's best interests in mind.