Penny stocks are in a special category because of some unique characteristics.

Understanding the nuances of trading penny stocks could prevent costly blunders.

Penny stocks can make you rich! Then again, penny stocks can make you poor. How do you make sure that you end up on the mountaintop and not down in the valley? Well, all it takes is a bit of study and some common sense. Penny stocks may be attractive because of their low price-per-share but it still makes sense to take a course in Penny Stocks 101.

There is no formal definition for penny stocks. Some believe that penny stocks must be priced less than one dollar. The Securities Division of the SEC considers stocks to be penny stocks if they trade for less than $5.00 and are traded in the "pink sheets" (National Quotation Bureau's (NQB) service), of the OTC or on NASDAQ.

If you purchase penny stocks through an agent be sure you know whether the agent is handling the penny stocks as an agent or as a principal, meaning the agent actually owns the penny stocks. Since the agent does not make a commission as a principal then the income is derived from the trade itself. The higher he sells the penny stocks for, the more he makes.

The difference between the "bid" price and "ask" price for many penny stocks is dramatic. In many cases, the price would have to double for the investor to break even. Many investors in penny stocks do not realize this.

Penny stocks may also be subject to a markup. If a broker carries inventory of a penny stocks for availability, they may mark up the stock to cover the cost of carrying this inventory. This inflates the cost even more above the bid/ask spread of many penny stocks.

Do your homework on penny stocks. Know the company and know the seller. Maybe you can even make a few pennies on your penny stocks.

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