Despite all of the problems with penny stocks and the millions of dollars of loss involved with them, there are legitimate companies whose securities trade in the pink sheets at very low prices. Struggling young companies just starting out are perfect examples. Investment in such a company, held through the company’s formative years, can pay off well.

Such an astute investment requires three things: the ability to choose the right company, the capital to invest and hold the investment, and luck. In order to choose the right company, you must know something about the business in which the company engages. You must be able to evaluate the feasibility of the company’s business plan and the company’s ability to compete in its field.

You must be able to evaluate the ability of the company’s management to run the company. Finally, you must be able to evaluate the capitalization and cash flow of the company. If you find the right company, you must be able to hold the investment for years to allow the company to mature and for the stock to appreciate in value.

Investment in “growth” companies is long-term investment. Furthermore, you must have sufficient capital to be able to withstand total loss of your investment. Investment in emerging companies is always a high-risk investment.

Finally, there is simply an element of luck in any stock investment. Luck plays an even greater role in a market in which manipulation is so prevalent. Some legitimate companies have had their stocks manipulated to such an extent that they were were forced out of business. Even without manipulation, the success or failure of a fledgling business is simply unpredictable.

Your online stock broker can be a tremendous help in evaluating information an investment. However, in the penny stock area, there are many unscrupulous brokers whose only goal is to sell. Be sure that the advice you receive is balanced and addresses your investment needs.

The risk involved in penny stock market are greater as compared to the Stock Exchange stocks. Stocks which are not listed usually belong to smaller companies and some might be bad and some good. Therefore, you must do your home work and research before purchasing stock.

Subscribing to a good penny stock newsletter could also help you avoid the pitfalls.

Warnings On Penny Stock Trading

When there are few or only one market maker, penny stocks are susceptible to price manipulation. A common and easy manipulation is for a broker-dealer to gather a large holding of a penny stock at a very low price. Through the use of high-pressure sales techniques, the sales force of the broker-dealer hypes the stock and stirs up demand, which seemingly justifies the continual rise in prices given by the broker-dealer (which isprobably also the only market maker).

The price continues to rise until there are no more investors who will buy, and then the bottom falls out and the price plummets. Sometimes the broker-dealer will buy back the securities at the fallen prices to recapture the stockpile for a future revival of the stock; more often investors are simply left holding the worthless stock.