In a nutshell, penny stocks though riskier in nature, offer investors with little capital the chance to earn potentially large returns. Penny stocks are essentially stocks that sell for under five dollars per share though many may be just pennies per share. In a sense, that is both the good side and the bad side of penny stock investing. Good in that if a stock sells for ten cents per share, then someone having only $1,000.00 to invest can conceivably control 10,000 shares. The downside is that often a low stock price is a symptom of low liquidity in the stock, meaning there are few buyers to sell shares to when it becomes important to liquidate the position.

Penny stock investors are advised to master and utilize proven strategies for penny stock investing. Many strategies have been developed over the past years that have been used successfully by investors in penny stocks. Those strategies are often explained on websites and in books so that they are free to acquire and use. In some cases however, illicit stock promoters will disguise their attempts at market manipulation as strategic guides and secrets, and these must be recognized and rejected. In other cases, useful and legitimate strategic points are found on websites offering penny stock commentary, and these are invaluable.

There are essentially two tiers of penny stocks, being over-the-counter stocks and pink sheet stocks. Over-the-counter stocks are stocks of established companies that are simply not able to meet major market listing requirements for their stocks due to company size, even though the companies and products are viable and profitable. These stocks are sold through broker-dealers rather than exchanges. Many of these companies do become listed on major exchanges, or may temporarily lose their listing status. The stocks generally have a reliable value demand among investors. They are liquid and can be sold readily. Pink sheet stocks, on the other hand, are not required to provide any financial details to would-be investors, and in many cases do not. These are stocks of small, struggling companies, and may even, in some cases, be false stock issues having no value outside of prices paid by investors. There is little or no information publicly available about these companies, their products, or their financial performance.

Often, advisers recommend that penny stock investors not trade pink sheet stocks because of the high level of risk. Investors are advised to trade established over-the-counter stocks, or even to seek low cost stocks traded on major exchanges. The suggestion is also usually made to limit penny stock investments to a small percentage of an investor’s total investment capital. If an investor has $10,000 or more to invest, then the suggestion is that penny stocks should represent only a small percentage of total investments. Penny stocks do present unique risks due to volatility and limited liquidity, and limiting one’s exposure to those risks is a sensible strategy to employ.

Generally speaking, penny stocks are not bought and sold on the strength of company fundamentals. Dividends especially can be ignored. This is because the best approach to penny stock investing is focused on short term trading. Many penny stock investors often engage in day trading, opening and closing positions in a single day. For this purpose, it is considered more effective to focus on technical trading utilizing charts to track stock trends and reversals. There are many different charts an investor might follow, but they include one day reversals, double tops, and head and shoulders tops. Information on these charts and their use is freely available on the Internet.

Penny stock investing is difficult because it involves trading in stocks of high volatility, limited liquidity, and limited information. At the same time, it presents an opportunity for small investors to realize very high potential gains while risking only small amounts of money. The best approach in penny stock investing is to use proven strategies.