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What Are Penny Stocks?

Put simply, penny stocks are stocks that don't actually cost a penny per share -- but might not cost much more that, either.
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If you've ever considered dabbling in the stock market, you may have heard about penny stocks. Many who are already familiar with the stock market have mixed views on penny stocks. Some say they just aren't worth investing in, while others have done very well with penny stocks alone, amassing a small fortune when the market is favorable.

What Are Penny Stocks?

Put simply, penny stocks are stocks that don't actually cost a penny per share -- but might not cost much more that, either. Typically, a penny stock is any stock that is priced at $5 or lower per share. The majority of penny stocks tend to be priced under $1 per share.

Penny stocks are favored by some investors because they don't carry as large of a risk as higher-valued stocks do, unless you were to invest thousands without seeing a substantial gain. However, if you pick the right stock and invest an ample amount, you could see your investment double, triple, and even quadruple within just a few days -- or even a few hours. Timing is everything with penny stocks, which is why some investors believe they actually carry the biggest risk of all.

Buying Penny Stocks

Even though penny stocks aren't considered high-value enough to be listed on the major stock exchanges, you can still purchase them through a stockbroker or a trading site online. Before deciding to buy any particular penny stock, you should attempt to learn as much as you can about the stock and the company. This can often be difficult, as most companies that offer penny stocks don't have a great deal of information to yield in the financial sense, because the companies don't have to file with the SEC when their stock is valued so low.

You can often find penny stocks that are too risky to invest in by discovering certain warning signs, such as whether they are traded over the counter (OTC) or through a regular market exchange. OTC stocks aren't subject to the same scrutiny as market exchange stocks, which makes them riskier. Additionally, if the stock history shows a steady decline, it could be a sign that the company is close to bankruptcy. Lastly, penny stocks that are hyped by third parties is often a clear sign that the stock is not a worthwhile investment.

The Benefits of Investing in Penny Stocks

Take the time to learn more about penny stocks before deciding to invest. Once you feel that you have a good understanding of how to invest in penny stocks, you can take the leap forward and hope for the best. Many investors enjoy risking their finances on penny stocks because the rewards can come quick and come large. A penny stock can jump from 10 cents a share to $10 a share within a two-week time span, which means big reward for the investor.

Gains can be even larger, but finding that perfect penny stock isn't always an easy task. Even if you play it safe at first and only invest a little, if the stock doesn't perform as expected, you may be left sitting on a lot of worthless stock nobody wants to buy, and subsequently you'll be unable to recoup your initial investment.

In conclusion, before investing big in the stock market, you may want to try your hand at penny stocks first. But the key rule is to be informed as possible before jumping on any stock, and don't stay invested long-term. If a stock isn't performing as expected, make the move to another before you are left with a stock you can't sell. Hopefully, you'll guess right -- and receive a big reward for your efforts.

Top Penny Stock Online Traders

If you need help picking an online trading site to start with penny stocks, here are some suggestions from us:

Best Overall: TradeKing

Bottomline: TradeKing has some of the lowest fees around when it comes to trading, which means more money you can trade with. It also has a wide range of investing options, so you can keep all your investments in one place, including your IRA. Here's a good breakdown of what TradeKing offers and what fees are involved.

Least Amount of Fees: OptionsHouse

Bottomline: OptionsHouse also offers super low fees when it comes to trading, which makes it a great choice, especially for beginners. It also has a lot of great tools to help you pick the right investments for you. This gives you a good idea of what OptionHouse offers in terms of investing options.

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