by Edgar Frost

Created on: September 20, 2008   Last Updated: October 08, 2008

There is certainly money to be made in penny stocks, but my advice is to proceed with caution. When I first began investing, I didn't have much money. I had considered investing in many types of stocks, and I finally decided to invest some money in penny stocks.

Penny stocks can be eye catching for investors with little money to invest. After all, with $500 you can buy 1000 shares of a $.50 stock or one share of Google. Sure, Google is a great company, but it's onle one share. Psychologically, there's something exciting about owning many shares of stock in a company, and if something positive happens with that company, there could be a substantial profit.

There's only one problem: Penny stocks are cheap for a reason. If a company is making a profit, experiencing tremendous growth, and is free of any legal or financial problems, then it probably won't be a penny stock. These stocks have low prices because they are experiencing some sort of turmoil. As a result, they're not in high demand, so the price has fallen substantially. This doesn't mean you should stay away from penny stocks, but it does mean that you should be careful.

If you decide to invest in penny stocks, here's some advice I like to use. First, look for stocks that are near their 52 week lows. One you find these companies, try to find out why their stock price has been hit hard. Is it because of a temporary problem that might be remedied in the near future, or does it appear that there are fundamental problems with the company? Investors often over-react and over-sell. If you can identify the over-selling, you may be able to pick a winner.

Now for the most important advice I can give you: Buy wisely. Make sure that penny stocks are only a small portion of your portfolio, and don't put all of your speculative money on one stock. Some penny stocks are just going through a rough patch and will rise again, while others deserve to be where they are. Once again, remember to proceed with caution.

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