Penny stocks are offered by organizations that are too small or new to be offered with the major stock exchanges to investors. Many investors are attracted to these shares as they require only a small initial investment, but bear in mind that there may be a high risk of declining to zero share value. Although these types of shares are definitely associated with risks, there is also a great potential for significant profits.

Picking out penny shares properly means you need to have an unbiased evaluation of the business model of the organization. Just like investing in other stocks, you'll have to understand what kind of business they're involved with and what business plans they're going to have for the future.

It is unusual for the organizations that issue these types of shares to have complex businesses-they are likely to be easy to understand and investigate. A common kind of penny share is a resource company that increases earnings when the resource cost it extracts is higher than a certain level. There are also some similarly valued oil exploration stocks.

According to the SEC, penny stocks are thought to be a high-risk investment. Regrettably, there is always the risk that even with adequate research, the organization will not do it. The guidelines on penny stocks for financial reporting are not as strict as they are for shares found on national exchanges. One of the penny stock types is referred to as a "pink sheet" and has almost no regulations regarding their reporting and accounting standards. This makes this kind of stock open to fraud and dishonest reporting because there are very little or even no regulations or standards. Fraudsters are going to use their influence to jump penny share prices to work, then unload and delist the stock. This is a well-known "pump and dump" conversation.

Don't let this kind of stock scare you off! Penny stocks have risks for sure, but they also have a great potential for a big profit. You can find scores of genuine, honest small organizations with tons of potential. In the coming future, tons of organizations that are regarded as penny stocks will be successful.