Considering buying Penny stock? The dream of many speculative investors is to buy an investment on the ground floor at pennies a share and ride a wave of momentum until it hits the top and then sell it for a nice profit. Inspired by the stories of people who profited from this stock trading strategy, these folks find their way into attractive, but infamous, penny stocks.

Penny stocks are generally just low-priced stocks that trade on major exchanges on the Over the Counter Bulletin Board (OTCBB) and on the Pink Sheets. The Securities and Exchange Commission (SEC) considers any stock that trades below $5 to be a penny stock. The benefits of buying penny stocks are often speculative in nature, although some of them are well-managed companies that have good potential for future growth.

Stocks in OTCBB are required to file timely financial reports with the SEC. This makes them as easy to run through a financial analysis as most other companies that are listed on a major exchange, but there are usually a number of factors that make buying low-priced stocks a risky investment as well. to have financial reports readily available.

Companies listed on the Pink Sheets are not required to file financial statements with the SEC. This makes conducting a full financial analysis difficult or almost impossible at times. Many of these companies have no track record of consistent good performance or no track record at all. This can be due to things such as: being newly formed or poor management that has led to some serious financial problems.

Buying stocks cheaply on OTCBB and Pink Sheets could potentially open a door to brokers exhibiting questionable or even fraudulent behavior (even more so than stocks traded on major exchanges). The initial public offering (IPO) of a penny stock could be due to the efforts of a fast-talking broker trying to get as much money as possible from interested investors. Also, a company could be almost worthless and the owners are selling it to the public.

The Internet is rife with mass emails, newsletters, and message boards from firms and brokers trying to let the recipient in on the latest “hot stock” secret that’s going to return 250%, 500%, or even 1000% if they buy quickly. These are usually penny stocks that could be on the verge of infamy if they aren’t already. The broker could be ready to fold at the earliest opportunity. These are just a few of the reasons an investor should be cautious when considering including these stocks in their stock trading strategy.

Penny stock companies can vary widely, from highly visibly structured companies to less organized one-man operations. The same can be said for the amount of information available for the public to be evaluating them. This makes it difficult to find investment gems to include in your stock trading strategy. Investors should do a little research to gain enough knowledge and confidence before considering buying penny stocks.