Penny stocks offer both rewards and risks for investors. Penny stocks (also known as “micro cap stocks”) are an affordable way for many to enter the stock market and learn about online stock trading since, as their name implies, they are exceedingly cheap stocks to purchase. The Securities and Exchange Commission (SEC) designates any stock that costs less than $5 a share a “penny stock.” For those with little capital to invest, penny stocks may constitute an important opening into the stock trading world.

However, penny stocks also have the reputation of being very risky investments. Why is this so? One of the primary reasons is because penny stock companies are often quite small in size and recent in formation, which means there is frequently little public information about the company available to help you make a decision about whether they are a good investment or not. Penny stock companies are also not held to the same standards by the SEC as larger companies, meaning they are not scrutinized or regulated as strictly. This means that they can have artificially inflated values, often a result of the companies paying individuals to make positive stock recommendations on their behalf.

Does this mean that beginning investors should steer clear of penny stocks altogether? Probably not, as there are those who trade these affordable stocks quite successfully. But it does mean that the beginning penny stock investor should certainly follow a careful and successful penny stock investment strategy, such as the strategy developed by James Connelly (who is sometimes referred to as the “Penny Stock Prophet” because of his success in the penny stock market). James Connelly developed a penny stock strategy while still a college student at MIT, and his strategy allowed him to turn a $1000 initial investment in penny stocks into $1.4 million dollars in just over a year.

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