Buy Penny Stocks - Risk Versus Reward

For those that are new to investing, penny stocks should be avoided until a thorough understanding of how the stock markets work is acquired. Penny stocks are highly volatile and illiquid so education is the key to profiting with penny stocks.

Penny stocks trade at the lower end of the stock market spectrum for various reasons, but mostly because they are usually start-up companies with more of an idea than an actual product or service. Most penny stock companies have very little cash on hand so they seek out investors to further their research and development often falling prey to predatory financial lending institutions that require the company to give up large portions of company stock in return for operating capital. Unfortunately, these toxic financing companies are more concerned with making money than the development of the company and often sell their stock relentlessly driving the company stock price down. Many penny stock companies with a great idea or new product have been destroyed by toxic financing along with shareholder value.

Unlike their higher priced brethren trading on the large stock exchanges, penny stock have the potential to increase by 1000% or more. Usually these major moves are preceded by news that a patent has been granted, or a large order has been received by one of a penny stock's customers. However, one of the most explosive news events for a penny stock is the announcement that the company is being bought out by a larger company. These explosive moves can happen over a period of days or weeks depending on the content of the news release.

Penny stocks should only be purchased by investors that have experience who have also taken the time to research and implement a proper penny stock trading strategy. It should also be understood that only investors that have enough disposable income that, should the market go against them, are able to withstand the loss. Scared money will often cause new investors to make unwise decisions that can decimate a new trading account.