how to buy penny stocks

The Are Penny Stocks?

Low-priced, small-cap stocks are known as penny stocks. Contrary to their name, penny stocks

rarely cost a tidy sum. The SEC considers a penny stock to be pretty much issue under $5. And

while there are sub $5 supply trading on big exchanges like NYSE and NASDAQ, a great number

investors don't think of these when asked to summarise a penny stock.

Most individual investors look at penny products like Wall Street's Wild West, an untamed world

having to do with investing detached from all the glitz and media coverage that comes with stocks

that are traded on vital exchanges. While the gains and losses can be beautiful impressive in the

penny stock world, they're not generally heard about elsewhere.

Just because you don't hear about nickel stocks every day on CNBC doesn't mean that tidy sum

stocks are without drama -- take SCO Group, any software company that brought on the wrath of

currently the world's computer-literati when it made claims to the UNIX operating system.

Unfortunately, penny stocks have also garnered one particular reputation as a game filled with

scams and data corruption. Indeed, penny stocks could be your wildest ride yet as the.

So then, if penny stocks usually aren't traded on normal exchanges, where can you buy them?

How to Buy Penny Stocks

Like any other stock you would buy, you can purchase shares of a penny stock through your

normal stockbroker -- regardless of whether or not it's listed in a major exchange.

While cheap stocks listed on exchanges wish NYSE and NASDAQ aren't typically considered

"penny stocks" an se, they can afford a lot of the edges of penny stocks without quite so much

risk. Those exchanges have strict listing requirements, and while they possibly will not allow for as

much of an upside in view that "true" penny stocks can, they tend to be whole lot reliable. More

often, though, penny stocks trade on list services like OTCBB and Pink Sheets.

Over-the-Counter Bulletin Board, possibly OTCBB, is a quotation. Unlike Pink Sheets, which is

only a quotation publisher, OTCBB maintains listing requirements (though may perhaps less

stringent than those of an exchange). For this reason, OTCBB has a little bit of added

authenticity.

Pink Sheets is a system that provides investors with quotation information when stocks that are

registered with it. Unlike OTCBB, however, Pink Sheets isn't registered with the SEC and is not

going to enforce any listing requirements. Bottom Line: Pink Sheets stocks are risky.

The Potential Payoff of Penny Stocks

With all our own risk involved, why would anyone want to put his or her her money in a penny

stock anyway? The answer is volatility.

Because penny stocks are prone to violent change (volatility), many people believe that they'll

luck out through a stock that will jump from $0.08 to $8 in two weeks. And it's happened. Scour

enough buying and selling message boards and you're sure to find success content from

investors who made a mint while "playing all the pennies."

Companies that can successfully make the jump from anything stock to power stock are rare, but

when find them they pay out in spades. Numbers will differ quite a bit in the penny stock world,

then again investors have raked in gains over 1,000% in per couple weeks' time. The real trick is

finding the right stock.

The Risks of Investing in Penny Stocks

Even bonafide penny stocks are plagued by very high risk. Five principal reasons that risk is so

inherent in small cap stock investing are low liquidity and poor reporting requirement.

As investors saw most recently with the sub-prime lending market, liquidity setbacks can be a

huge deal for investors. And rather than lending, low liquidity plagues the penny stocks on a daily

basis. Because penny stock investing is such virtually any niche area, even relatively low trade

volumes can eat an impressive effect on a stock's share price. According to to the Securities and

Exchange Commission (SEC), "Penny stock shares may trade infrequently, which means that it

may seem difficult to sell penny stock shares once you own them. Because it may be difficult to

find prices for certain penny stocks, they may be impossible to accurately price."

What this means is that if you engage with penny stocks you may end up with a brand new whole

lot of worthless stock that you can't pick-up rid of.

Another concern for investors is the lack with regards to stringent reporting standards for

companies whose stocks trade on OTCBB or in the Pink Sheets. OTCBB does require that

registered companies stay current with SEC filings, only those filings are the bare minimum -- well

down further what an exchange-traded company would have to file.

Since institutions that are delinquent in submitting their filings to the most important SEC are still

so accessible to individual investors, penny stocks have proven to be a treasure trove over

dishonest people.

That's one of the reasons that the Securities and exchange commission's has taken such an

active role in making certainly that the American public is protected from unscrupulous

establishments and individuals in the penny stock arena. For your incredible broker to even sell

you a penny stock, they will be legally required to send you a document outlining that this risks of

penny stock ownership. There's a reason and regulatory bodies go to such lengths to help make

sure that you're not blindly investing in penny stocks; scammers are out there.

What's With the Penny Stock Junk mail?

Spam is the scourge of the earth. It fills our e-mail inboxes with garbage and junk, and chances

are if you get a decent amount of spam, you would possibly have seen messages designed to

promote penny stocks.

But the unsolicited mail isn't relegated to e-mail. Message boards, chat rooms, session groups --

even advertisers on legitimate websites -- unquestionably are all home to their fair share of the

bits and pieces. It goes without saying that you shouldn't go on the market and buy a stock that's

praised in a questionable e-mail, but some people do, and scammers make a large group of

dollars off of unsuspecting investors.

One of the largely prevalent types of penny stock scams out there is truly the "pump and dump."

In a pump and get rid of scam, the bad guys load up on a bargain-priced and worthless stock,

convince inexperienced investors to buy it at inflated prices (pump), and sell their shares right off

when the investors push the price up enough (dump). For help on avoiding pump and dump

scams, look over out the SEC's article on the matter.

How to Snip Those Pennies

So now that you know the scary section of penny stocks, how can you cash in about the potential

growth that they have to offer? Here are three things you'll want to look for when picking a penny

stock to make sure that you will don't get penny stuck: Underlying business, financials, and

footnotes.

When it comes to penny stocks, a company's underlying service is even more important than it is

in exchange-traded stocks. That's because the penny stock world is natural to "shell" companies

that are legally incorporated, but in no way have any business operations. Shell companies are a

handy opportunity for scammers, because they can be easily arrangement up as a "pump and

dump" stock. Look for companies with real, sustainable business operations and you'll be one

step closer to finding a good penny sell.

Like with any stock, a penny stock's financials are an essential tool for investors. But with penny

stocks, this particular question is more about the quality of the lending statements. Does the

company file on time? Who becoming the auditing firm? Do the company's financials look in a

healthy condition? If you can answer yes to those three questions, it's time to stroll through the

footnotes.

In most companies, footnotes are an oft-overlooked, yet very important part amongst its filings.

And while you might be able if you want to get by without reading GE's footnotes, miss the

footnotes for a penny stock, and your portfolio might let pass its mark. Since penny stocks are

smaller companies that the majority of are more prone to things like related-party transactions and

consequently non-GAAP accounting oddities, don't walk around the footnotes for a penny stock.

Conclusion

Fact: Penny stocks are inherently risky. Fact: Penny stocks can be fodder for scammers. Fact:

Pound stocks can make you a lot of money.

Even accompanied by all the risks and drawbacks involved in penny stocks, many investors

simply find that the potential windfalls can be well worth it. There's a reason that penny carries

several remain popular among a brave clique of investors: Anything stocks can deliver a very

impressive return. Hopefully, you are able to find that your new penny stock know-how makes

those Wild West of investing a little more tamable.

Jonas Elmerraji is the editor and portfolio manager of the Rhinocerous Stock Report, a free

investment advisory that returned 15% in 2008. He is a contributor to numerous bank outlets,

including Forbes and Investopedia, and has been highlighted in Investor's Business Daily, in

Consumer's Digest and on MSNBC.com.

Educate yourself about in depth strategies on how to trade penny stocks

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