A penny stock is a stock that is not traded on a major exchange such as the NYSE, NSADAQ or AMEX. It is usually traded over the Pink Sheets or OTC bulletin boards. The stocks generally sell for less than $5 per share of stock, although some will argue that penny stocks sell for less than $2 per share, but the point is that they cost very little per share. Investors are attracted to the penny stocks because of the low investment price which makes them seem all the more lucrative.

Penny stocks have long fascinated investors because the potential to make great gains is there. Because the volume of trading is low, a quick up tick in the market could net you a 1000% return on your investment. Now you are starting to realize the potential to make a lot of money. The key, of course, is in selecting the right penny stocks in which to invest.

Penny stock investing is not an exact science. You must do your research by reading the prospectus that the company provides to you. They must list market potential for their product, list who the competition is and list the challenges that they are facing in getting the product to market. In addition, you as an investor must be very discriminating when it comes to reading press information on the company. Is all the positive information written by the company's own public relations agent or does some come from outside sources?

Penny stock companies could be years away from getting their product to market. You must be prepared to see little or no change in the stock for years. Again, the upside to penny stocks is that when they begin to move, they move very quickly. Traditional stock trading might earn you an 8% return on your investment, but a penny stock has the potential to yield 500% or more. Now you are beginning to understand why so many want to be involved in penny stocks.

Did you know that Microsoft was once a penny stock company? However, for every Microsoft company in existence, there are 1,000 penny stock companies that will never give you a return of your investment.

It is hard to figure out the worth of penny stocks. Most penny stock companies do not have revenue or sales figures to report, some do not have a product ready for market and others do not have an inventory of goods. The penny stock prices fall and rise simply based upon buying and selling demands.

The Securities and Exchange Commission (SEC) website explains that penny stocks can be a very risky investment. They advise potential investors that they should prepare for the possibility that they could lose their entire investment in penny stocks. If you are not deterred by that possibility, there is a potential to make a quick buck with penny stocks.

A word of caution: Penny stocks do not trade regularly which can make them difficult to sell once you own them.