If you’re new to trading stocks, penny stocks may seem appealing to you.  If you’re unfamiliar with them, you can see from the name itself that they are cheap stocks.  The actual amount can vary, though.  Some people classify them as being $5 or less, others just $1 or less.  They do have their advantages, but there are also some pretty big pitfalls to watch out for.  Here are some guidelines to help you gauge the opportunity vs. the risks.

Opportunity

• Penny stocks are advantageous for an obvious reason: they’re cheap.  This means you can buy more shares of the particular stock that you’re interested in.
• More shares=higher profit.  Of course, this is assuming that your stock rises, but when it does, your profit percentage will be quite high.
• Penny stocks move quickly. It is not unusual for a  stock that is worth $0.10 to quickly become worth $1. If you owned $100 worth of stocks at $0.10, they would now be worth $1,000.

Risks

• Penny stocks are risky just by their very nature.  They can rise and fall by hundreds of points multiple times during a single day.  You either need great faith in the stock or the ability to constantly keep an eye on it and know the right action to take.
• There is normally little to no solid information available on the company.  You should be able to trust the company you’re investing your money in, so research is crucial.  It’s possible that your penny stock is either a very new business or an older business in danger of bankruptcy.
• Lack of information means no history.  This makes it difficult to analyze any financial trends that the company has experienced, turning your investment into a guessing game.
• You risk unknowingly falling into a scam.  Penny stocks are sometimes sold through spam emails and subscription newsletters.  Just as with any other email in your spam folder, you must be careful about any decisions you make to go ahead and buy stocks through someone you don’t know and haven’t investigated.

It sure looks as though the risks far outweigh the opportunities, doesn’t it?  The truth is that any stock that you invest in comes with risks, and you’re just as likely to lose your money as you are to gain no matter the case.  Penny stocks do come packaged with a few risks, but for someone with little money to invest and little experience, they can be a good stepping stone with huge potential.  Make sure you do as much research as possible before investing, and find a trusted source to help  you.  Your best bet with any stock is to work on gaining experience first.  When you’re comfortable with reading trends, you can move on and take some bigger risks and make some bigger profits.