Penny shares can fall into one of four categories. These are recovery stocks, cyclical stocks, technology companies and biotechnology companies. Unless you are an expert in this field it is unlikely that you have a huge understanding of these terms so here is a brief explanation of each and how they work.

With regards to recovery stocks, a favourite recovery situation is the shell company, which is a quoted company that does not trade. You get dirty shells which is an ex - operating business and clean shells which have been formed to seek acquisitions through a reverse takeover. It is normally better to invest in a shell only after it has announced a deal as this lowers any risks and means that you are more likely to make profit. Although this may make penny shares seem like a daunting and confusing topic, speaking to someone who knows a lot about them can help you understand them a lot better.

Cyclical stocks tend to be seasonal so it is very important to keep an eye on these when buying penny shares. The stocks rise and fall in value depending on the business cycle of the company. For example, mining companies close in the winter because of the weather so share prices decline because of this. However, when business resumes as normal in the spring and summer, the share price rises again. One of the best and most reliable areas to invest in with this category is house - building and anything similar to that. The best time to invest in this is when the economy is strong because these companies will be seeing the benefits of the housing boom which makes your penny shares worthwhile.

Technology companies can be risky investments if you don't do your research properly. This is because their share prices can rise or fall dramatically in a matter of weeks which may mean that you end up losing money on your penny shares. The best way to stay safe is to check that the company has significant revenues and what they are earning now and what they are likely to be earning in the future.

Biotechnology companies can also be a risky sector to buy penny shares from because very few of their products reach the clinical development stage. Again, in order to stay safe check that they do a range of products and have a partnership with a major pharmaceutical company that will provide finance in the early years of the company.

If you consider all of these things when investing in penny shares you should have a happy and healthy investment that will make you very happy.