I’ve never been a big fan of penny stocks. That doesn’t stop millions of people from investing in them every day. I feigned I get more and more visitors every day to this site looking for information on penny stocks and since it is supposed to beginners guide to the stock market I guess I’d better cover it in a little more detail. Get me wrong, I don’t doubt for a minute that people make money buying and selling penny stocks. Don’t leave lots of comments at the end of this post detailing much money you make. I get it, it’s just not for me. It just goes against what I’ve learned so far the buying and selling stocks online. From my own experiences, is much more worthwhile to look at things in the long-term. It’s also less time-consuming because I don’t trade shares nearly as much as those of you who buy and sell penny stocks.

So let’s get started with this latest lesson. Penny stocks exacerbate the element of unpredictability and excitement in modern-day stock market investing. Although new investors are generally advised to restrain from investing in these stocks, history is littered with examples where these very stocks have helped millions of people make a substantial amount of money. This is why so many people want to try penny stocks. It seems easy, there is little risk and the profits can be huge.

In essence, penny stocks are high-risk securities belonging to small companies with limited footprint and are traded on Pink Sheets and OTCBB (Over the Counter Bulletin Board). While taking calculated risks can help you make money by investing in penny stocks, there are certain pitfalls which every investor/potential investor must be wary of to minimize losses. This goes for any type of investing. Don’t assume because you’re trading in small amounts that the risk is reduced. There is still a good chance that you could end up losing your money.

One of the problems with buying penny stocks is that they can seem deceptively lucrative. It is important to understand that not everyone can make a fortune by investing in these stocks. Just in exactly the same way that not everyone will be successful with value investing. If that were the case, the investment fraternity would comprise of millionaires. Small start-ups usually announce their arrival by getting their shares listed as opposed to launching an IPO simply because of economic constraints or the absence of a feasible business road map. While not all companies offer penny shares for this reason, it would be prudent do evaluate the present/future credentials of the firm. This is another issue I have with penny stocks. I’m unable to do the normal level of analysis that I would do to one major company where I feel that the stock price is undervalued. It just messes up my whole process for buying shares.

Another thing to look out for is complacency over the company’s financial performance. Although most new companies do make losses in the first few quarters or even years, an investor must regularly monitor the company’s performance. In cases of substantial losses, one must delve deep to find out the underlying reason for the same. Maybe there could be fundamentally wrong with the start-up. By the same token, it is worthwhile to observe how and where the company re-invests its profits.

Another common pitfall for buying penny stocks is failure to understand the dynamics. New investors invariably fall into the trap of buying mindlessly large quantities of the stocks, thinking that these are their best picks. The reasoning behind this is that these stocks are traded at such low prices that any upward changes could translate into seriously big numbers within a couple of day’s time. While this does make sense occasionally, one must realize that a penny share’s value can plummet equally fast, or even faster. There’s so many sites dedicated to the best penny stock picks purely because of this.

The final pitfall for buying penny stocks that I would like to highlight is lack of an investment plan. This is easily the most common pitfalls of penny stock investing. Most investors get disheartened by any loss they incur by way of penny stocks and as a result, exit the market in a hurry. Then there are those who continue to make sizable profits but refuse to book them primarily because of the greed factor. Discipline and adherence to an entry/exit plan is the key here as obscure and aimless investing leads to nowhere. This is one of the key points that’ll you’ll find on any stock market for dummies site.

Overall, I leave up to you to decide if investing in penny stocks are worth the trouble. There’s no doubt I’ll still get visitors to the site looking for quick and easy ways to buy penny stocks online. This is too many stories of people getting rich quickly from hardly any initial outlay. Make sure you are cautious of any stories like this is usually intended to sell you something. It could simply be penny stock brokers trying to gain new customers. It may even be a software company trying to sell you automated stock trading software with promises that you will get rich. From my experiences, there are no quick ways of making money in the stock market. It takes a lot of hard work, perseverance and patience. You have days when your stocks seem to be plummeting Ifand the whole world is tumbling down about your ears but especially with value investing, we have the assurance that you have a strong investment which will eventually pick up. If you decide against penny stocks have a read at my options trading for dummies guide or spread trading.