Generally when we think of stocks & shares the names that immediately comes to our mind is names of the big stock exchanges like the New York Stock Exchange or NYSE, the American Stock Exchange or AMEX and the National Association of Securities Dealers Automated Quotations or NASDAQ. Penny stocks are low priced stocks of small companies whose market value is below $100 million and they trade in low capacity.

Penny stocks deal with other exchanges such as the Pink Sheets and OTCBB. Investing in penny stocks means preparing yourself for a good amount of risk because of its low capacity trading features. Thus the Securities and Exchange Commission has warned investors that due to its low trading capacity the investors may not find a buyer for these shares and also due to the unavailability of precise rates there are strong chances of investors losing their investments completely.

Penny stocks do have their fair share of advantages though, which suits those investors who are new to this field and want a good investment plan which can result in increased profits with a lower investment. The price changes can take place a number of times in a day which adds to the appealing factor. You can get double or even triple the value of what you originally invested in penny stocks. So this is a great attraction.

Penny stocks can also affect you adversely if the stock values dip suddenly, so those who are new and inexperienced should be careful before deciding to gamble with the major chunk of their investment. Also because the requirements are not very demanding on the OCTBB and Pink Sheets exchanges, these companies lack guaranteed investment returns.

Most of the companies listed with these exchanges do not have credible financial backgrounds to predict whether they are good investment options or not. Sometimes the companies that are closer to bankruptcy levels or those that are new are associated with penny stocks. Some traders have resorted to unethical measures by buying the stocks in bulk to create an impression on individual investors for a need to buy them.

As most of the stocks are less in demand, the investors will have to quote a lower price that can result in incurring a loss. However, not all companies take to fraudulent tactics. Some may be small companies that are gearing up to take their place on the larger exchanges. But as an investor it is better that you choose the company that you have done satisfactory research on and whose market value you know will increase in the future.

The Author’s website Buy Penny Stocks Guide features articles, tips and advice to help you understand penny stocks. We also look at how to spot Hot Penney Stocks - and see if there’s any money to be made buying oil penny stocks.