In order to fund these activities, they sell shares in their companies for attractively low prices in the hopes that they indeed find marketable quantities of the resource in question. In the event that they do indeed find what they are looking for, the value of the company increases by many factors resulting in amazing returns for investors. These stocks are incredible volatile for three main reasons: the first is that they are already trading in ‘pennies’ so a one penny increment can represent an enormous percentage difference in price.

Secondly, as investors await word from geophysical tests and explorations, the price is incredibly vulnerable to rumours of all kinds that one or another investor may feel is or is not applicable to the success or failure of that particular company.

The third reason that these stocks are so volatile is that they are often traded at incredibly small volumes leading them to be incredibly susceptible to buy or sell requests from speculators.

Unfortunately, these stocks are also vehicles for dishonesty and insider trading. In the case of BRE-X, for example, the stocks price increased by many multiples on news that resources were found that would result in unprecedented profits. Such news gave an incredible injection of positive will towards the company and many people invested their entire life’s savings, only to find that these results were fraudulent and that the company did not in fact have any basis for their reports, but making millions of dollars for those responsible in the meantime as they allowed their stocks to increase in value, and selling before the collapse was exposed. Caution should always be practiced when buying and selling penny stocks.

There’s a common perception that they are very risky, and there is some truth to this. The risk is not caused by the low price of the penny stocks. Many foreign exchanges typically price even their blue-chips in share prices which are less than a dollar. And because penny shares are not marginable in North American brokerage accounts – which means your broker won’t lend money against their value – they are actually less risky than stocks that trade for higher prices, as the most you can lose with pennies is your initial investment.

But there are some ways in which penny stocks are riskier than stocks that trade for higher prices if you’re not good at understanding the stock market. They tend to be smaller companies, and thus their management is not typically comparable in quality to that larger companies where the remuneration paid to executives can be much higher. Their smaller capitalizations make them more subject to insider manipulation. And they tend to be involved in riskier enterprises such as mining exploration.

In addition to the added risk, there are some other difficulties in trading penny stocks which you should consider. Institutional investors – such as mutual funds and pension funds – avoid them because they are too illiquid to buy in large quantities. This creates a problem for the retail investor as well. If you accumulate a large position in a penny stock you may find it very difficult to reduce your position. There simply may not be enough buyers who wish to buy your stock on any given day. In fact, some penny stocks are so illiquid that they do not trade every day. This illiquidity leads to another problem in trading them: the large bid-ask spreads. The bid-ask spread is the difference between the bid price and the asking price of a share.

In penny stocks it can sometimes be very large, with the difference representing a large percentage of the share’s value. With penny stocks it’s important not to put in market orders unless you’re confident that the spread is small, and that there is sufficient volume trading to fill your order. Otherwise, make it a practice only to use limit orders, and be patient. Volatility is another problem with penny stocks. For this reason you should generally avoid using stop-losses, particularly with very thinly traded issues, as you can easily be stopped out of a position simply by routine trading swings.

Penny stocks are risky, but they can also be rewarding. Returns of 100 percent, 500 percent, or even 1000 percent or more do happen. And since you can only lose a maximum of 100 percent on any single trade, you don’t need to pick a winner every time in order to make a significant return on your investment. Just be sure to limit the portion of your portfolio invested in penny stocks, and then pick a basket of them, rather than putting all of your money into a single name or two. Trading penny stocks can increase your investment returns, provided you trade them with caution, and are fully aware

However, if any of these companies hit it big, their shares go up a ton and that makes the original investors big dollars. The term return of investment is a word tossed around used to show how much you get on your investment. The best performing stocks in the past decade have been penny stocks. Penny stocks start low and when they get to be a few dollars per share, that is huge profits since the percentages are so high (some into the thousands time the starting price).

Cheap stocks provide for large potentials but large losses since there is a ton of risk. Anyone can invest in a safe company like a Microsoft or Google by buy stocks online, but those are expensive and barely go up, but are steady. Penny stocks are one of the easiest ways to lose money. Everybody and their mother buy penny stocks hoping to make money. You run into a ton of pump and dump techniques, where someone boasts about a stock, waits for an increase in price, and then sells all of theirs. Penny stocks are actually not that liquid and are very tough to gauge.

The prices of the stocks are almost actually never affected by what the company does, but what the market does. There are some penny stocks that can do well, but extreme research is needed. One must look at the financials of a given company to really see if the company has profit potential. One of the biggest things to look for is liquidity and assets, meaning having lots of cash, with almost no debts. Finding this is just about as rare as finding a penny stock that hits it big. Anyone can invest in penny stocks, but the risk is so great, it really is not even worth it. You may even have a better shot winning the lotto.

Online penny stock trading has been a big favorite among the home-gamers trying to make it in the stock market. I’ve said it before and I will continue to say it…You can make a boat-load of money in trading penny stocks, but you can lose it just the same. I’ve watched stocks go up 30%- 150% in just one day, only to see them come down to even lower levels the next day. Yes, some people did make money, but only the ones that were aware of the situation to sell on the first day.

To make matters worse, it seems that some of these penny stock sites will go ahead and inform you that a stock they’ve been following has climbed 40% or better (but if you’re like me and doubt many different trading strategies offered on the web), you’ll might see that they really didn’t start announcing their praise until the stock in question had already rose in value. If you don’t do your research and your homework on any stock you want to buy, you can’t blame anyone but yourself for the consequences. If you fell for the hype that some of these websites spew out on a daily basis, you will have lost most (if not all) of your money.

Take into consideration that even a broken clock is right twice a day. These websites will at times get it right and pick a company’s stock that will climb by leaps and bounds. If you get in at the right time, you will profit from their recommendation.

When you come right down to it, there’s a law of averages that you need to think about.

Just recently I bought Sirius/XM Satellite radio (NASDAQ: SIRI), for $0.05 per share and took it up to $.50 per share in just one month. That is a a gain of 900%. Those types of percentage gains can only be done with penny stocks. The reason I said that I haven’t made as much money with these type of stocks is because a year earlier I bought into a stock at $2.94 (cost average) and watch it drop down to below $2.00 in no time at all. I had more of a stake in that company than I did with the more recent one.

I’ve said it before and I’ll say it again, you need to look hard at any company that are thinking of investing or trading in. Look at their balance sheet, their debt-to-earnings ratio, listen in on the conference calls when and if they’re available. If you don’t and end up losing a big chunk of your investments, you have no one else to blame.

They are plenty of people out there that say that they can “show” you the way to picking penny stocks, but the truth of the matter is that you pick penny stocks the same way you pick any publicly traded stock, you do your research into the company first. If you can’t do that, then you shouldn’t be buying stocks in the first place.

I’ve been watching Sirius for quite some time and the reason I got into the company was because I knew that the company would find the financing that they needed. I also know that this company isn’t going anywhere anytime soon.

If you really think about it for a minute, why is someone that you never met and most likely never will, want to give you a list of penny stocks that he recommends for no charge? What a great guy that he would want to help total strangers make money in the stock market and do it at no cost to you.

Because in a sales pitch like stock trading you have to give away something to get the person to see if you know what you’re talking about. Trading in penny stocks is big money for brokers and the houses they work for.Why is it that penny stocks seem to be a big thing within the stock market? Well actually they’re not as big as you may think in regards to owning the shares. The smart money ( the pros of Wall Street) don’t buy and sell penny stocks, there’s too much risk involved. Instead if they want to get into a company that has it’s shares at penny stock levels, they’ll actually loan them the money with interest.

They may seem like a big thing to you and others that you may speak with, but not when it comes to the smart money on Wall Street. It’s the amateur trader and the day trader that wants to trade in penny stocks on a regular basis. The reason for that is that they have the reputation of having big percentage gains (or losses) in any given day. You can make (or lose) a load boat load of money real quick.

If you’re looking to get a list of penny stocks and plan on buying and selling them, be careful, it can cost a lot more than just a few pennies.

In the auto industry we now see General Motors (NYSE:GM) and Ford (NYSE:F) trading in the $3 range. GM hasn’t seen these levels since 1943. In January 1999 they were trading at $87 per share and in the beginning of this year (2008) they were at $19. Now eleven months later they are on the verge of bankruptcy and trading at just $3 per share.

Ford is in the simular situation, they were at their all time high of $37 per share in March 1998 and are now trading at less than $2 per share.

Fannie Mae (NYSE:FNM) and Freddie Mac (NYSE:FRE) the two government sponsored mortgage brokers have also lost 98% of their valus since the beginning of this year.

American International Group (NYSE:AIG) were just saved by the government after losing 97% of their value.

For all intent and purpose, these stocks can now be classified as penny stocks. Many traders, especially the newbies and amateurs trade penny stocks for a couple of reasons. One, the price per share is cheap and two, penny stocks typically have the tendency to jump big when refer to as percentage gainers.

Do you really want to start trading these companies that I’ve listed? The answer should be no, but I’m sure quite a few of you guys and gals out there are already do so. I will tell you that these companies as well as their stocks are broken. They are all leading companies that help build this country, but because of bad business practices are now in big trouble of going away for good.

So if you want to trade these penny stocks, go right ahead, but don’t say I didn’t warn you.

Like I said there are many that are listed on the big board, most of them are alternative energy companies that are trying to hit it big. When you want to buy penny stocks online there are many places that you can go.

The one that I like the most is TD Ameritrade, a online broker that I’ve used for some time now. Their customer service is beyond great, which is to me the most important part of choosing a online broker. Since I’ve used them for so long and so much for my trades, I now pay only $7 a trade no matter how many share I decide to puchase.

Zecco is another company that is out there to use. They offer you 10 free trades per month with a $2500 minimum equity balance, after that it’s $4.50 per trade. their customer service is not as good as Ameritrade, but they do have a community board where you can talk to other traders for ideas (rule #1- there’s no such thing as a good stock tip).

Another company that I’ve not used is Scottrade. They charge $7 per trade, but they do have a lot of other fees that are listed on their site for other services that they provide. I never used them because of that reason. I feel that if you are there to provide a service of trading stocks, then that is where that only charge should be.

If you look on the internet for an online broker, you will find that there are many more, but do your research on these companies before using any of them.

Beginners

No one likes to say that they’ve just started in the stock market, but all of us started out at the beginning. Sometimes it’s the new guy who does well. (in my first three months, my portfolio grew 68%) and when you look to the experts, you will see that they’ve lost more money than you’ll ever see in your life time. They’re human too, but with an arrogance to them that sometimes bites them in the butt.

As a beginner you may want to just start with a “mock” portfolio and watch the stock market until you get more of an overview of how the stock markets work.

Amateurs

The amateurs are beginners with an attitude. They are the type that have been doing this for a short time and have had some positive results during that time. They look at what they’ve done in a few months and think that this whole stock market thing is easy. HA! They are also the first ones to think that they have it all figured out and they’ll be quitting their jobs in pursuit of trading stocks full-time. Once you have a good understanding of the stock market, your next step is to possibly stick with ETF’s (exchanged traded funds) or Mutual Funds. You can sit with an adviser to help make the choices that you need. Be aware though that these managers get paid by how much money you invest into their funds. The commission can range from .01%-5%, which can make all the difference in the world

Semi-pro

These are the type that got burned when they thought that they knew everything. They’ve done a lot of homework on how to reduce their losses, but they’re still not doing enough research into the companies that they want to invest. What they do is they trade in penny stocks (share value <$5). They feel that the risks are low since each stock is “only” $1.22. What they don’t know is that penny stocks are much more riskier than other stock (company) in the markets. Penny stocks are not a sure thing. Just because the share price is less than $5 doesn’t mean that it won’t go down more or even become bankrupt. When you play at this level, you must be aware of changes that will occur without warning and be prepared. If you feel that this is the way you want to go then make sure you check out each company in great detail.

Professionals

This last group is not the guys who work in Bear Sterns or Morgan Stanley (remember these are the type of guys who cause the housing and credit crisis from their immoral ways. A real professional doesn’t let his emotions get in the way of his trades. They do their due diligence and detailed research into each company they’re thinking about. They don’t just dump money into a stock because the herd is doing it. They take their time, they know that it’s a matter of patience and discipline. If you are at this level (or think you are), don’t sit back on your laurels. Just keep doing what professionals do…study and practice.