I believe most people know what stocks are. A stock’s price multiplied by the amount of outstanding shares represents the value of the company. A company’s worth can be characterized by total assets minus all its obligations. Stocks may be more or less profitable, according to the company’s efficiency and ability to return to profit for every dollar that was invested in it.

Publicly traded companies are traded on three major exchanges like the New York Stock Exchange (NYSE), National Association of Securities Dealers Automated Quotations (NASDAQ) or American Stock Exchange (AMEX). Even though quite few penny stocks are traded on these exchanges, most of them are traded on the OTC:BB (over the counter bulletin board, also known as the pink sheets.

Potential to make incredible amounts of money in a relatively short period of time, indeed, is one of the most attractive factors that attract investors to penny stocks. Because decreased listings, any change in prices can lead to one hundred times the initial investment. Some people can become rich overnight if they make the right choices.

Moreover, there is also the possibility of losing money. Penny stocks can also go down 50% or more in just one day of trading. Which is why you need to do even more research onto the company before making any investment. Unlike the big stock exchanges, stocks traded on the OTC:BB don’t require to do the same types of quarterly reports as the others. Another issue to be aware of is the fact that most penny stocks don’t have any analysts following the company to really get an idea of what they are up to. Of course you can call the company’s public relation department to get some answers, but then again you have to remember that the person you’re talking to works for the company and may exaggerate the company’s performance. As the old saying goes… Let the buyer beware.

Acquiring reliable knowledge about companies is the secret to investing. Unfortunately, information about penny stocks is hard to find and this is one reason they are so risky. Companies that are listed as penny stocks are either newly formed and have no history, or do have a history with a poor track record. Another reason they are so risky is because they are not regulated.

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At most, all a penny stock company has to do is to make sure that they file with the SEC on time. In other cases, companies are not required to file with the SEC at all and thus remain unregulated. In fact, this may be the reason the company has become a penny stock, because it was listed on one of the big three exchanges, but failed to uphold its reporting requirements to the SEC.

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In addition, a lot of the information that is available about these companies is not credible. People often think that large companies started off as penny stocks, but this is always not the case. What they are mistakenly looking it is the adjusted stock price. The adjusted stock price does not take into consideration any splits the company has. What happens here, is that people assume the stock started out as a few pennies and worked its say up into the $100 range it is now.

However, what usually happens is that the stock starts out at $20, gradually works its way up in price and splits many times in its history. The biggest risk with penny stocks is that they are used by a lot of fraudsters. Due to a lack of regulation and oversight, these stocks are used by fraudsters for “pump and dump” schemes. The fraudsters buy into the company and then promote it.

Once people start buying in, the fraudsters cash out all their stock and make a nice profit, leaving everyone else holding the bag. Ways of promotion include sending spam mail and paying off figureheads on television and radio to promote their stock. Always make sure to never to buy stocks based on spam. You should also check to see if the media contact owns the stock or is being paid by the company that they are promoting.

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