The SEC or Securities and Exchange Commission classifies penny stocks as those that sell for less than $5 a share. Of course, different exchanges consider those selling for less than three dollars or even one dollar to be penny stocks. Essentially, penny stocks are those that are not traded on the major stock exchanges like NYSE, AMEX, or NASDAQ. It actually depends on the market in which you're trading. Penny stocks are somewhat more risky than many others but for good reason. Just as they are very risky, they are also quite profitable for those who manage to trade penny stocks successfully. The risks in penny stocks go well beyond the obvious and are part of the reason that payoffs are so rewarding for those who are lucky. There’s very little skill involved in successfully trading penny stocks but a lot of luck. If you’re a gambler at heart, then this is definitely your kind of investment. It is rather important, however, that you enter into penny stock trading with the firm understanding that you aren’t likely to be successful. In fact, chances are good that you’ll lose as much as you make from the opportunity. There are those, however, who have managed to defy the odds and win quite handsomely in the game we’ve come to know as penny stock trading.
A few things you need to keep in mind before you start trading in this highly risky market include the following: First of all, penny stocks are not like regular stocks where they’re heavily traded and there is almost always someone waiting in line to buy. When you decide to sell, it could be some time before a buyer comes along. This means penny stocks aren’t the most liquid stocks in the world, and if you want quick access to your money, this is definitely not the stock for you. Another thing to keep in mind when it comes to penny stocks is that there is usually little or no information on these companies. Unless you have excellent research skills and the time and energy to put them to use in your trading endeavors, you are unlikely to find much background and financial information on these firms compared to many publicly traded companies that are practically required to open their books to investors. This is dangerous for investors because information is crucial and schemes are plenty. Every penny you invest in penny stocks should be a penny that you are very well prepared to lose and completely happy to earn a return with. You might hit the lottery on your penny stock investment and earn truly three to four (or more) times what you invested in your stocks. The likelihood is, however, that the opposite will be the case and you will lose your investment. As long as you are prepared to handle the consequences and allow yourself to be pleasantly surprised when your trades pay off, you will be the best person to trade in the penny stock market. When making your decisions about the types of stocks, bonds, or funds you wish to include in your portfolio, it’s your decision to include a few penny stocks for the sake of diversity and to risk a small sum of money on a long shot. You never know when those long shots will pay off.