There are many reasons why investors dabble in penny stocks. Low-priced shares seem a good place to start for common folk wanting to learn the basics of stock trading. Or perhaps an employee who has inside knowledge of the potential of the company he/she works for would want to invest in its stock before the business really takes off.



Penny stocks are kind of like a high-stakes hobby fun and exciting, drawing people who want to get rich.

Because penny stocks are usually priced below five dollars, it is easy for anyone to purchase them. However, as with any discounted offer, buying penny stocks comes with risks.

The key to a successful penny stocks investment is knowing when to buy and when to sell.

The first rule of trading penny stocks is never to place a market order. On the NYSE or NASDAQ, you get your stock for the listed price when you click the buy button. On the OTCBB and Pink Sheets, there is a chance that the market makers will raise the asking price of a stock prior to filling your order.

To protect you from fluctuations in the asking price, always place a limit buy order. By setting a limit, you are telling the market makers that you would like to buy a stock for a certain price. Market makers may not fill your order immediately in an effort to make you raise your limit price.

Do not fall for this trap unless the stock is hot and the market is moving quickly. Decide how high you are willing to go and do not chase the ask price of a slow-moving stock. When placing an order, set your limit somewhere between the bid and the ask price.

Like the buy order, market makers can manipulate your sell order. If you indicate that you are willing to sell at the market rate, the market makers may quickly drop the bid prior to filling your order. Unless you have the time to monitor your stocks all day long, it is highly advisable to place a stop-loss order on your penny stock investments.

A stop-loss order will protect you from sudden drops in the price of a stock. But don't set the stop-loss order at a value that is too close to the current price of the stock. There is a good chance that the stock's normal trading activity will trigger your open order and cause the sale of your stock.

Buying and selling penny stocks requires caution and finesse. Prices move quickly on these markets so pay close attention. An effective way of monitoring your stock investment is the use of a stock screener, which should be available on your broker's website. The stock screener will locate stocks that fit parameters that you are comfortable with.

You have probably heard of the buy-low-sell-high strategy. Sometimes good stocks fall in spite of strong business fundamentals. If you can identify these stocks, you can acquire them at a significant discount.

Be careful when buying tanking stocks. When a stock is going down, it usually means the company is in trouble. Always check for news on pending litigation, cash on hand, debt on the books, shares short, etc. Stock investment experts often advise to wait until the penny stocks have established a sustained upward trend before taking a position.