There are a couple definitions of penny stocks floating around there, but the one we use (and the one from the U.S. Securities Exchange Commission) is this:

Penny stocks are stock of a company that's trading under $5 per share.

A common misconception is that the term "penny stock" has something to do with a company's assets or size. However, the term strictly applies to the price a stock is trading at and has nothing to do with a company's market capitalization (microcap, small cap, etc).

If you're new to penny stock investing, I'd invite you to read our beginner's introduction to penny stocks at PennyStocksCapitalist.com. Just click that link and it will take you to "Penny Stocks 101."

Fraud is popular in every area of life, especially in the investing arena. The penny stock world is routinely hit by various scams, usually "pump and dump."

A "pump and dump" scam is very simple. First, the con artist buys a large position in a penny stock. Next, he/she/they rush penny stock forums to "pump" it up. They'll also use email blasts. The average person sees this, doesn't do their research, and jumps in. Finally, the con artist sells the position off, making a lot of money, and walks away. Those left in are treated to a plummeting stock.

Not becoming a victim of penny stock fraud (or any stock fraud) is fairly simple. Here's three ideas for you.

As you'll notice, these ideas apply for every stock in the world.

1. Always do your research. Really, it's fairly simple. When you think you have a good stock, use the Internet to locate news (from reputable sources). Is the company actually in operation? Are there news items? Can you see what they're doing?

2. Only trade with well-known stockbrokers. Never use stockbrokers that aren't well known, period. You're just opening yourself up to all sorts of potential issues (not limited to just penny stocks).

3. Trade with the exchanges. In other words, trade penny stocks that are listed on the NYSE, Amex or Nasdaq. From what we've monitored, the majority of "pump and dump" scams take place in the Pink Sheets OTC Bulletin Board arena. That's not to say they're all bad, just that by trading elsewhere, you limit your exposure to potential trouble.