Do you buy one Google share that can go as high as $560? Or 100 penny stocks for $2 each? Sure, Google is a fast-rising company, but what are the chances of its stock price doubling in a week?

The beauty of penny stocks is that they have the potential to double or triple your money in a short amount of time. Some companies have gone from 50 cents to $2 within days, up to $25 in a few weeks. Candie's (CAND), Avanir Pharmaceuticals (AVN) and Stolt Offshore (SOSA) have risen 85%, 70% and 42%, respectively, in just over two months. One research firm showed that stocks listed in 2004 as penny stocks more than doubled and tripled their prices in a year.

While penny stocks present a huge reward potential, you should know the risks that come with them before spending your hard-earned money.

They are small

Penny stocks look small because they are. Penny stocks do not usually go over $5 per share. Compared to the big players trading in the NYSE and NASDAQ, companies marked under $5 are usually startups that have minimal capitalization, hence less protection for you. And because these are small transactions, not many brokers will spend time and money on them.

Fly-by-night companies proliferate

Stock exchanges have strict requirements when it comes to declaring financial information. In addition, unscrupulous companies that want to circumvent these rules often end up listed with the penny stocks on over-the-counter markets.

They spell trouble

Many companies are marked down because they suffer from some type of financial problem. Companies are delisted, or removed from the stock exchange, when they go out of business, declare bankruptcy, fail to meet the listing rules of the stock exchange, or have become a private company after a merger or acquisition.

While penny stocks are a risky business, they have great potential if you can find the good companies. Many upstanding companies trade under $5, including JDSU, a billion dollar company that trades at $2 per share. Computer giant Microsoft was itself once a penny stock. And Norstan (NRRD), a tiny company that sets up phone systems for the government, is now trading at $25 from as low as $3 a couple of years back.

The best way to find excellent under-$5 stocks is through online and printed newsletters from independent research firms. Useful websites for investors include:

pennystock.com

finance.yahoo.com

thehotpennystocks.com

hototc.com

Always remember that as a general rule, do not put too much, if not all, of your money into one company. No single investment should be more than 2% to 5% of your overall portfolio. New investors should not open an online brokerage account with commissions over $10 so they don't have to spend too much in fees.