Penny stocks are low-priced stocks, generally with a value of less than $5 of small companies. These stocks are traded on the Over-The-Counter-Bulletin-Board (OTCBB) and the Pink Sheets. Both these trading venues do not have the similar type of minimum requirements of exchanges for example Nasdaq or the NYSE set by the Securities and Exchange Commission. Companies which issue penny stocks might be either new businesses or close to bankruptcy. A new issue of stocks could be a way to introduce quick capital to try to save the business.

All of these factors like low price, lack of standards, and lack of stability, make penny stocks one among the riskiest investments around. It is factual that if a company succeeds the payoff will be great, but the huge majority of penny stocks end in bankruptcy. Other reasons why penny stocks are risky include;

1. Lack of Information about the Company:
There is no necessary for the company to issue financial statements which are listed in the Pink Sheets or the OTCBB. The majority companies also have little reportable history.

2. Low Liquidity
Penny stocks are rarely traded, so finding a buyer may be difficult. The price may have to lower significantly to interest someone in buying the stock.

3. Potential Fraud
Due to their unregulated nature, penny stocks are frequently used by con artists who sell them through spam email or off-shore brokers.

Penny stocks are risky but are there any benefits to them?

Not all penny stocks are frauds or among the companies facing bankruptcy. Some represent hard-working businesses that are striving hard to meet the requirements to get listed on NASDAQ or the NYSE. Investing in these companies suggests real growth potential, you have the occasion to get in at the ground floor and ride all the way to the top.

The complexity is finding which companies have this growth potential. Getting this information requires a lot of research and unless you are enthusiastic to take the time to personally investigate a company, you might again be the victim of fraud. Several companies specialize in offering 'inside information' about companies selling penny stock, however they may simply be fronts for pushing a particular stock on unsuspecting investors.

There are two techniques to play the penny stocks. They are do research or play craps. The low cost of these stocks means that you will not lose bundles of money if the company goes under. As well as long as you are prepared to lose this money penny stocks can be an interesting and fun accumulation to any portfolio. It must be stressed out, yet, that penny stocks should only make up a small portion of any portfolio. The probability is that most penny stocks will end up in a total loss.

If you are willing to buy penny stocks you need to find a broker who will place an order for you. Many brokers will not cover them since of the difficulties in tracking them; however some online brokers specialize in penny stocks. Regulations require that the brokers have to receive written confirmation from the client concerning about the transaction. The broker in turn is expected to give the client a document outlining the risks of speculating with penny stocks.

Lastly, the broker must disclose the current market price of the stock and as well as the amount of compensation the firm receives for the trade. Monthly statements must be sent to the client about the market value of each penny stock in the account.