Risks, Benefits and Tips on Buying Penny Stocks

I've been receiving quite a bit of spam email from people promoting penny stocks - also known as "micro-cap stocks". I decided to do some research to find out what all the fuss was about penny stocks. What are the risks and benefits involved with investing in these types of stocks?

According to the Securities & Exchange Commission (SEC), any stock under $5 is a penny stock. However, some investors set the bar at $3 and some even go down as far as $1 to consider it a penny stock. These companies are quoted on the "pink sheets" system, otherwise known as OTC trading.

Risks involved in buying penny stocks:

1. Some of these companies are not required to file with the SEC.
2. Lack of information or history about a company. For many investors, they want to invest in companies that have some kind of track record or can prove that they will make money. However, with penny stocks, you're usually dealing with companies that are fairly new or on the brink of bankruptcy.
3. You may not be able to find a buyer if you decide to sell.
4. The chance to lose alot of money - especially if you've invested quite a bit of money in a particular stock. But then again, you could lose money with just about any stock!

The big benefits in buying penny stocks:

Many investors are attracted to penny stocks because of the opportunity to make mucho dinero in such a short amount of time! If you buy 10,000 shares of a stock trading at $.10 and the stock doubles overnight, you've doubled your money! Also, sometimes these penny stocks "grow up" to be traded as mid-cap stocks, multiplying in value many times over.

To help eliminate the risk in buying penny stocks, follow these tips: