Penny stocks are share offerings available to the public by organizations that are just too new or small to be offered with the bigger stock exchanges. There is high return potential, and your initial purchase can be rather small, but you do stand the risk of the business becoming shut down and you losing your money. Although there are some risks inherent with these kinds of stocks, there's also a large prospective for remarkable profits.

Choosing penny stocks wisely means that you should have an independent assessment of the organization's business model. Much like choosing shares of any other type of publicly traded organization, it's necessary to read up on everything about the business. This relates to understanding what the business do, the product they make, which products or services are offered, how their business model works and who else is involved in their industry.

that makes penny shares so appealing is the idea that most of the organizations issuing them are extremely uncomplex. One common sort of penny share is a resource company that gains when the cost of the material it produces increases above a certain level. There are also some oil exploration stocks that are valued in the same way.

As you may have already guessed, penny stocks are considered to be investments with large degrees of risk. The risks you take on with these shares include indirect and incomplete reporting of financial issues, limited trading volume and unfortunately even fraud.

Reporting rules on penny stocks are a lot less demanding than they are for stocks listed on the bigger exchanges. One of the kinds of penny shares is called a "pink sheet" and has virtually no regulation when it comes to reporting and financial accounting standards.

Since there's low or even no regulation, it makes this type of stock vulnerable to fraud and market manipulation. A common schemes is called referred to as a "pump and dump" - individuals manipulating the price of shares to increase and then get rid of all of their stocks in one chunk leaving other investors out big money.

However, we don't want to scare you off these kinds of shares! Penny stocks certainly have risks but also carry a large potential for a large profit. You can find plenty of real, sound small companies, and they have tons of potential. Tons of companies that are looked to as penny stocks are destined to be a success in the oncoming future. Investors who can choose a strong company will get a generous reward.

If you are able to spot companies that have potential, your profits are going to be big. Even if you were to post a loss on most of your penny share picks, the one successful pick will give you such a sizeable gain that you'll not remember about the stocks that fell in value.

Copyright (c) 2009 Grant Dougan