But penny stocks have a different kind of potential, that most newbies in the stock trading industry seem to overlook. Firstly one considers the price per share in the stock market.Since penny stocks are exactly what its name indicates, the price per share ranges from a few cents to maybe a dollar or two.

So when we look at the price and the range with which these climb up and down in the Intra-Day Market ( Buy and sell the stock in the same day), you need to be aware that you can lose or gain a lot in one day.It’s fluctuations like these that keep many new investors from trading penny stocks.

Now if you look at the details of of a stock you can buy with $100. A Blue Chip company with $100 per share would give you one share at that price, but a penny stock with a $0.10 per share will give you = 10,000 share at that price. Blue chip stocks will rise and fall within a few pennies or a dollar, which counts for about a 1% change. If the $0.10 stock goes up a penny or two, you stand to gain 10-20%. so unlike blue chips stocks, penny stocks have much more room for growth. In a world of Emerging Markets it is these penny stocks that have the potential to grow faster than expected. Provided that you choose the right penny stock, you can make huge gains with them. Take into consideration, that since these companies are new and are trying to make it big, they could also go out of business and you stand to lose all of your investment.

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