» Penny Stocks, that is, stocks which trade usually for less than a $1.00 per share, offer the investor an affordable stock and the promise of huge gains. But for each penny stock that blooms into a winner, there are a thousand losers.
» It is a misnomer to describe penny stocks as always trading at less than a $1.00, since a penny stock can trade much higher after heavy promotion. In Canada most penny stocks trade over-the-counter or on junior stock exchanges since penny stock companies do not meet the requirements for listing and trading on a senior stock exchange such as The Toronto Stock Exchange.
» In the United States penny stocks trade on the OTC Bulletin Board in the NASDAQ listing system.
» Penny stocks are dangerous investments to the novice investor because of the tremendous amount of risk that they carry. The novice investor is unaware of the true nature of the penny stock and therefore is easy prey for the promoters that promote these stocks.

» Prices of penny stocks can change dramatically. Because of the limited number of outstanding shares in a penny stock company, the price of such shares can increase or decrease dramatically on little buying or selling.
» Newly publicly traded companies are usually penny stocks. These companies have been listed to attract new equity financing for their hopeful ventures. However, many penny stock companies boast of prospects of imminent discoveries or deals that will propel the stock of the company higher.
» Prices of the penny stock company can be easily manipulated. With a limited number of outstanding stock and with much of the shares held by insiders, the price of the stock can easily be promoted or even bought upward. Promoters can give the stock the appearance of being actively traded by trading among themselves and can raise the price of the stock to lure unsuspecting investors of potential gain.
» There is little or no information about these companies because they are newly formed or are simply shell companies with no assets. With no historical or financial record, it is difficult to know what you are buying into.
» Penny stocks can be difficult to sell because of the limited interest by the market. Penny stocks usually have heavy trading during the promotion stage, but once the promoters and insiders have sold their stock, there is no continued promotion to attract new buyers.
» Penny stocks are subject to "pump and dump" scams where promoters will engage in heavy promotion to get the price of the stock to rise. Traditionally, promoters would cold call as many individuals as possible in the attempt to lure new investors and to create excitement for the stock. Once the price of a stock achieved a high enough price, the promoters and insiders would sell the stock at a profit. New investors would then hold worthless stock at high prices which they could not then unload because there would be no other new buyers to come in and buy the stock.

While some penny stocks company may be the next Microsoft, many are not. To avoid investing in penny stocks that are the tool of scammers, you can:
» Beware of unsolicited email or telephone calls. Salespeople will try to lure into buying their stock by promising high gains without risk. Only deal with people you know. If you have any questions about a penny stock, call your broker who can assist you in learning more about a stock.
» Don't make hasty decisions after speaking with a promoter or after hearing a tip. Promoters will try to make you believe that an opportunity to make millions will only exist for a short time. These attempts to make you excited about a penny stock will sometimes lure the novice investor into making bad decisions. Always think about what is being sold to you and if you feel uncomfortable, stay away from such investments.
» Don't believe any promise of great profits at no risk. No investment can deliver guaranteed profits at no risk. If you hear such claims, beware that you might be being scammed.
» Don't believe in claims of inside information. Promoters will try to make you think that they have inside information that will, once disclosed to the public, cause the price of the stock to rise. Trading on insider information is prohibited at law. Usually promoters are not disclosing inside information, but simply false information to get you excited about the stock.
» Do your own research. Look at any recent press releases of the company and take the company at face value. Analyze the company based on existing facts. Ignore any promotion that the company is about to make a great discovery or land a great deal. Look at its prospectus and any other company information that has been files with a securities commission or exchange to determine exactly the type of risky company that you are being lured into.
» Just say no to risky companies. There are plenty of legitimate companies that offer growth without great risk. There is no need to invest in risky ventures when money can be made in strong companies with legitimate products and services.
» Be true to yourself. Know what your tolerance to risk is and how much you are willing to invest and lose. If you invest in a penny stock be prepared to lose everything.