by James Garton

Created on: June 13, 2010

Penny stocks are a risky investment, betting on companies that trade under $5.00 per share. The stocks are traded over the counter (OTC) on the Over The Counter Bulletin Board (OTCBB) or the Pink Sheets (PK).

The downside to trading on the OTC is that there is not the same volume found in the larger exchanges, like the New York Stock Exchange. Trading is also done directly from one owner to another, and because of the low trading volume prices can jump or drop quickly.

When you have a rapid fluctuation of prices, and a small volume of trading taking place this combination creates risk. If you have a stock that jumps up and doubles overnight it could also drop below the price it was purchased for. If trading volume is low an investor may not have enough buyers to cash out profits or liquidate when prices decline. Basically, an investor can find themselves trapped in a trade with no way out.

However, with the right stock you could easily invest $1,000 and watch it double or even triple in a short period of time. This opportunity for rapid gain is what attracts so many to penny stock investing.

The other attraction to penny stocks is the ability to have a large percentage of ownership in a small company. How often do you have the chance to get in on the ground floor of a truly unique venture, that has real promise for success? With the penny stock market you have thousands of opportunities with countless companies to become part owner of the next Microsoft.

Selecting the next big winner is not easy. What makes it even more difficult is the little to no requirement for companies trading on the OTCBB or Pink Sheets, to turn in report to any regulatory authority.

Unlike the New York Stock Exchange, which requires companies to meet strict requirements and constant reporting. Any company that fails to report, or drops below their standards will be removed from the exchange. Since OTCBB or Pink Sheets lack this rigid standard the level of risk increases.

While risk can be bad, it also offer the opportunity for an investor to have a greater reward. Because of risk, the majority of stocks trade at low prices even below a penny per share. You may not want to make penny stock investing your sole portfolio strategy, but it can offer the opportunity for rapid accumulation of wealth.

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