When traders talk about penny stocks they are talking about shares of businesses that are valued at pennies per share. Penny stocks can have high growth possibilities, and your initial investment can be very low. But you can also face the possibility of a company going belly up and you losing your hard earned dollars.

Yes, there are definitely risks taken in these types of stocks, but there is also a considerable potential for enormous earning potential. You just have to be good at researching these companies before you start to trade.

Choosing penny stocks sensibly means that you should have an impartial overview of the organization's business model. Exactly like buying other stocks, you need to know the type of business they are doing and what business plans they have for the near future.

It's not likely that the businesses have difficult to understand business plans - usually they're easy to understand and research.

You should be aware that penny stocks are high risk stocks. The risks you may find with these shares include improper financial matters, limited liquidity and even fraud.

Always remember that the financial reporting guidelines for penny stocks aren't always as rigid as stocks on bigger stock exchanges. Unfortunately there's virtually no regulatory prerequisite on penny stocks, no set accounting rules or guidelines.

Therefore this kind of share is very susceptible to becoming manipulated and even used for fraud. Commonplace schemes known as a "pump and dump" are all over the place. Pump and dump refers to investors manipulating the price of shares to increase them and then unload all of their shares immediately as you start to buy the stock and then you are left holding the bag and losing a ton of money.

Nevertheless, even with that said it doesn't necessarily mean you should avoid these shares completely. There are many real, legitimate small companies, and they have a lot of potential. Many companies that are categorized as penny stocks are destined to become successful later on. Anyone who can choose a valuable penny stock will get a generous profit. Think about NutriSystem and WalMart, which used to be penny stocks.

Whenever you choose organizations that have potential, your investment can be huge. You might drop money on several trades, however when you get a winning trade it can provide such a great profit that any prior losses will not be a problem.

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