A penny stock is any stock selling for less than a dollar. At times, some investors use the definition to indicate stocks that trade for less than fifty cents.

Some consider a penny stock as a stock trading off of a major stock exchange, which is worth less than a dollar. Where the stock originates is not all that important in the definition, since the main defining factor is really the price.

Penny stocks are sometimes called differently. Day traders and investors use that term interchangeably with terms such as nano, micro, and small caps. It is usually companies with small capitalization amounts that offer penny stocks.

Even if penny stocks are easily affordable, finding information about the companies selling the stock is more challenging. When dealing with larger companies selling stocks at prices higher than a dollar, it is easier to find information based on reports they are required to file with SEC.

But even with the limited possibility of research, penny stocks allow you the opportunity of making your way in the world of investments starting from the ground up. You may have to do more legwork to do your homework on penny stock companies, but it can pay off in your investments.

If you are interested in a penny stock company, you can check and see if their financial information is available to the public. You shouldn’t just blindly believe information about a company you have received from a third party.

If you notice anything questionable, such as if the auditors haven’t certified the company’s financial statements, you should carefully back out. Another red flag is if the auditors have declared that the company may not have enough money to keep operating.

No minimum standards have to be met by penny stock companies in their listings, since they are done on the OTCBB (OTC bulletin board) and the Pink Sheets.

Why are penny stock investments risky? While the cost to trade penny stocks is relatively low, the risk is a bit higher because you don’t have a way to see the history of the company or the stocks and how it factors into your investment strategy.

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