A Reasonable Introduction to Buying Penny Stocks - Investment - Stocks and Bonds

While you can make money buying penny stocks, you should understand that it is a complex field with as much if not more risk than reward. You must be cautious and skeptical if you're seriously considering buying penny stocks.

So what exactly are penny stocks? Well, that can be a little difficult to pin down, but a good place to start is to go by the Securities and Exchange Commission (SEC) definition: A penny stock is any higly speculative low-priced stock.

Many in investment, however, use some other benchmarks to be more explicit and precise. Some call a penny stock the same thing as a micro cap stock, which is any stock featuring a market capitalization under $250 million. Others say that a penny stock is a micro cap stock which lists for below 5 bucks per share. Still others believe it must be all of that and it must list within the Pink Sheets or the OTCBB rather than NYSE or NASDAQ. If it is all those things, it is definitely a penny stock, but keep in mind when buying penny stocks that the definition is nebulous.

You will find, in fact, many fundamental problems with penny stocks. People have said that penny stocks have been a bit of thorn in the side of the SEC for years because of how little information is available on them. When listed on quotation services like Pink Sheets and the OTCBB, they don't need to fulfill the same base minimum requirements as exchanges like the NYSE and stocks listing within Pink Sheets aren't even required to report to the SEC.

Additionally, these stocks often feature low liquidity (which basically means they're difficult to sell compared to most stocks... so if you're hyped to buying penny stocks you may have a hard time selling them before their value drops) and little corporate history. You will have a more difficult time tracking down real, verifiable data on penny stock companies and simultaneously you will be exposed to a disturbingly large number of fraudsters trying to give you falsified information to pressure you into buying their penny stocks.

I hope this helps you calm your excitement and think more rationally about buying penny stocks. While you can indeed make money with penny stocks, you should never be persuaded to begin buying penny stocks without doing your own due diligence.

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