Before you part with your money to invest on penny stocks, make sure you do your research first and get as much information about the microcap company. Don't rely on your friends for tips; they probably know less than you do. Because information about microcap companies and penny stocks is hard to find, you will need to do a Sherlock Holmes and ferret out that information.



Investigate whether the company's securities are registered. Companies that go public must register its securities with the Securities and Exchange Commission.

The law also requires that the following should file reports with the SEC:

* companies that have 500 or more investors and $10 or more in assets,

* companies that are listed on the stock exchange boards of Boston, Chicago, Cincinnati, New York, Philadelphia; the American Stock Exchange, the Pacific Exchange, the Nasdaq Stock Market, and the International Securities Exchange; and

* companies whose securities are listed on the OTCBB

Only the extremely small companies are exempted from filing reports. The information about the company

contained in the quarterly reports, annual reports, and reports of significant events that it submits will indicate whether it is making or losing money, and why. The documents that are filed with the SEC are public records, and you should be able to find them in the SEC or from your state's securities regulators.

Make sure you know enough about the company's business and its products or services. If you plan to invest in a company's penny stocks, you should know what you are buying. Don't go rushing to buy penny stocks just because you heard a tip that you think is good.

Read the company's reports, particularly its financial statements. Financial reports are a good indicator of whether a company is making money or not, and therefore worth investing in. Pay particular attention to the company's revenue, earnings, debts, and assets. Check too if the company's financial reports are audited and certified by an accountant. If these are not, then be wary.

If a company does not file reports with the SEC but sells its penny stocks, it is still required to file an annual report under Rule 15c2-11 of the amended Securities Exchange Act of 1934. If you cannot find any information about the company or its penny stocks from the SEC, your broker should be able to give you the information that was reported under this rule.

Find out about the people running the company. Information about the people running a penny stocks company can indicate if they have a poor history of moneymaking. Have they made money for their investors before? Have they had run-ins with the securities regulators or the investors? The state securities regulator should be able to give you this information about the company's heads.

Check if your broker and his firm are registered and licensed. A legitimate broker should be registered with the SEC and licensed to operate in your state. Ask your state regulators too whether the broker has received any disciplinary sanctions or complaints. If it has, take this as a sign that the broker may not be an honest one.

Penny stocks have the potential to give your big earnings for your investment, but only if you are buying into a legitimate and above-board company. Don't jump into the pool with your eyes closed, otherwise you could be saying goodbye to your hard-earned money.