According to Investopedia Inc., the penny stock market has experienced phenomenal growth in the past decade. From ’94 to ’03, OTC bulletin board trading volume increased by a staggering 8900%, equaling a total of 63% of NASDAQ and 78% of NYSE stock volumes. Many investors have succumbed to its siren songs.

It’s not hard to see why. Penny stocks are typically traded in lots of 1,000 and, as the name suggests, are bought (and sold) at incredibly low prices. There is no official price limit, and differences of opinion range from stocks trading below $1.00 to as high as $5.00. Others distinguish according to the market in which they are listed (the OTCBB, OTC or “Pink Sheets”, for example). However, others designate stocks as penny stocks based on their market capitalization, or the value of each share multiplied by the total number of shares outstanding. Regardless of the details, a general rule of thumb applies to all penny stocks: They are a very high-risk investment. Conversely, there is also the potential for amazing rewards.

But for every pot of gold at the end of the rainbow, there are thousands of cliffs and traps along the way. The risks and dangers of penny stocks are many. On the stock market, “best price” priority is given to orders at a higher price than yours if you are buying or a lower price if you are selling. The combination of this priority with what is very often low volume trading means that there will be times when you find that your orders cannot be filled. Also, there will be cases where you will have to settle for partial fulfillment of the order. And these are just dangers you face when your stock is performing well.

Penny stocks come from companies that are often less than credible and, unlike some of their more expensive cousins, can be swayed by the power of rumors. Press releases, the news, widespread whispers, and even online forums and chat rooms can be responsible for drastically influencing your performance. This volatility creates two considerable challenges: 1) a high potential for schemes and scammers; and 2) the inability to use traditional stock charting methods with any real effectiveness. It goes without saying that this is not a market for the faint of heart.