One thing that some investors believe is that all stocks start out small and as “penny stocks”. This is just not true as most stocks are offered initially at much higher amounts. When stocks come on the open market, they just don’t start out costing pennies.

There is usually a very good reason that a stock is classified as a penny stock which typically means that it costs less than five dollars and it is traded on the Over The Counter market instead of the Dow, NASDAQ or AMEX. You need to fully understand these reasons and the risks involved in investing in them.

The most common reason is that it may be or have been going through some troubled times. If a stock gets that low in price, the reason is never good. Stocks of companies that are doing well just don’t get that low. It may be a combination of the companies fundamentals and the industry it is in, but penny stocks are not as solid as the stocks that are in the major indexes.

Adding to the risk of buying penny stocks is the lack of strong regulatory requirements on the OTCBB. Companies that want to be traded on the Dow need to satisfy all sorts of requirements and meet an array of minimum standards. Penny stocks do not have those same regulations and in fact many of the stocks that get kicked out of the major indexes end up over the counter.

Because of the lack of regulations, there is typically more fraud in penny stocks and easier manipulation of the prices. So, although you can get in at such a lower cost, the risks are substantially higher than investing in stocks that are on the three major markets.

Only you can decide if you want to buy penny stocks and obviously you should do it with “fun money” or money that you can stand to lose. My preferred choice is to stick with the bigger stocks and be an ’investor” rather than a “trader”.