Seen by many professional investors as one of the most precarious ways to invest your money, buying penny stocks can be both ruinous and profitable in equal measures. Penny stocks, also known as nano cap stocks or micro cap stocks, are shares of a company with a relatively small market capitalization, and shares that are traded at a low market value – typically under $5 per share.

Nano cap and micro cap stocks are actually two different beasts; nano cap means the company has a stock market value below $50 million whereas micro cap stocks are valued between $50 million and $250 million – for the purposes of this article though, I will use the term penny stock interchangeably between the two. One thing that both types of stock do have in common is they are both traded OTC (over the counter) – this type of stock is seen as, essentially, a lot more unstable than traditional Nasdaq quoted companies.

The Internet is awash with websites that will tell how you can make a fortune with this type of trading, but in truth penny shares are extremely volatile, and while you can make a lot of money if you choose wisely, you can lose it equally as fast on other trades or if you don’t realize your profits at the right time. You can literally lose ALL the money you invest in a share if that deal goes bad.

There is however a number of factors that will help you avoid the many pitfalls associated with buying penny stocks:

1. Find yourself an experienced dealer – if the dealer is online, this will save you money on dealing charges, and also give you a point of reference to run your ideas by.

2. Avoid message boards – online message boards are notorious for being manipulated by the big players in this field. By the time you have read a tip any potential profit will have been reaped by someone else (assuming there was profit to be had in the first place)

3. Learn you trade carefully and cautiously – if you are a novice, do your research before you invest any money. I did a dozen or so ‘dummy trades’ where I chose the shares I wanted to buy and committed an imaginary sum of money to each share – you’ll be amazed at the results, and far more cautious about future real trades.

4. Never commit more than you can afford – you can easily lose you shirt on penny trades, so don’t over commit yourself. If you ever consider leveraging this type of stock (my advice would be DON’T under any circumstances), you must realize that your losses could be multiples of your original investment.

I think I’ve made it clear that this type of dealing can be highly speculative. Take your time, learn the process and proceed cautiously, that way you should keep yourself safe.

It’s easy to get burned in the stock market, so you need to armed with quality information. If you are interested in learning how to buy penny stocks successfully, visit the authors website for tons of great information.

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