Beware any insider information when trading penny stocks.

If you are ever offered insider information by anyone, don’t be tempted to act on it. Strict rules are in place and if you are found out, not only will you have to repay any profits made but you will more than likely face a heavy fine or worse.

Beware penny stocks in untried markets.

Whilst many microcap companies are in standard products, in established markets many are not, focusing instead on new untested products and untried markets.

Whist doing your penny stock research you want to be able to research the market for the product and the newer and more untested the product and market, the harder this will be to do.

Investors often misunderstand bankrupt penny stocks as they are unsure of the bankruptcy process. They assume the company is now protected from further financial harm.

In reality, all bankruptcy protection means is the company can no longer be pursued by creditors and that it can prepare a repayment plan and that the company will be reorganised.

The biggest penny stock risks come about via negative situations that adversely impact the stock price.

Over the next few weeks we’ll be looking at various negative situations to look out for.

The Reverse Split

Company share splits are common among the larger Blue Chip companies as a way of issuing more shares and reducing the share price.

Obviously everyone want to buy into a rising penny stock but there has to be a limit.

The problem with buying into a penny stock that has risen more that 100% in a one week period is that many investors will be sitting on profits of up to 100%. At this point those investors can sell and walk away with big gains.