Penny Stocks, that is, stocks which trade usually for less than a $1.00 per share, offer the investor an affordable stock and the promise of huge gains. But for each penny stock that blooms into a winner, there are a thousand losers.

It is a misnomer to describe penny stocks as always trading at less than a $1.00, since a penny stock can trade much higher after heavy promotion. In Canada most penny stocks trade over-the-counter or on junior stock exchanges since penny stock companies do not meet the requirements for listing and trading on a senior stock exchange such as The Toronto Stock Exchange.

In the United States penny stocks trade on the OTC Bulletin Board in the NASDAQ listing system.

Penny stocks are dangerous investments to the novice investor because of the tremendous amount of risk that they carry. The novice investor is unaware of the true nature of the penny stock and therefore is easy prey for the promoters that promote these stocks.

What makes a penny stock different from others?

• Prices of penny stocks can change dramatically. Because of the limited number of outstanding shares in a penny stock company, the price of such shares can increase or decrease dramatically on little buying or selling.

• Prices of penny stocks are very volatile. Price swings can happen quickly and frequently. These stocks are subject to heavy promotion and manipulation. Since investors are attracted to the affordable price and the potential for large gains of a penny stock, the risk of such stocks is largely overlooked.

• Newly publicly traded companies are usually penny stocks. These companies have been listed to attract new equity financing for their hopeful ventures. However, many penny stock companies boast of prospects of imminent discoveries or deals that will propel the stock of the company higher.

• Prices of the penny stock company can be easily manipulated. With a limited number of outstanding stock and with much of the shares held by insiders, the price of the stock can easily be promoted or even bought upward. Promoters can give the stock the appearance of being actively traded by trading among themselves and can raise the price of the stock to lure unsuspecting investors of potential gain.