Firstly, penny stocks are stocks that are priced between 1 cent and $5 and they are traded via the Pink Sheets or the OTC Bulletin Board. These stocks can also be traded n foreign and other securities exchanges. However, when trading penny stocks you must be aware of the rules that apply to the trade of penny stocks.

The SEC or Securities and Exchange Commission has set out the rules that regulate the trade of penny stocks, these rules are as follows:

The brokerage house will need to obtain a written agreement regarding the transaction from their customer and their customer must be approved in order for the transaction to be able to take place.

Each brokerages firm must supply their customers with a document that outlines all the risk that come with trading penny stocks.

Consumers must be informed about whether there is a market quotation on the stocks they want to purchase and what that quotation is.

The consumer must also be aware of the commission charged by the brokerage firm on the trade.

The SEC requires that each brokerage house provides it’s customers with a monthly statement outlining the market value of each of their penny stocks.

The rules governing the trade of penny stocks were put in place to ensure that trades were fair and that investors knew about the risks before investing. These rules were set in place by the SEC to ensure that new investors knew what they were getting into and that they wouldn’t get in over their heads.

The penny stock rules include a Customer Protection Rule (Rule 15c3-3) that states that all the money you pay to the broker is in their control. Brokers will need to figure out on a regular basis how much of the money they are holding belongs to their customer or was gained via stocks owned by the customer. If the broker comes to the conclusion that there is more money on their hands than that which is owed to their customers or which has been paid from their customers then this money is put into a reserve bank account. This money is for the sloe purpose of being a benefit to the customers. This vital rule helps to stop brokerages from using their clients money to further their own business interests.

These rules are designed to protect all aspects of stock trading, the investors as well as the brokers and also the stock market. If a broker breaks any of these rules set down be the SEC they can be the subject of SEC investigations which can lead to problem within the brokerage house. Learning these rules is a good idea for any new investor, this can help you to make sure that your broker is following the rules and helps you to make sure that your investments are not compromised.

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A penny stock is defined as any stock that is trading for less than one dollar. Some investors customize their definition of penny stock to indicate certain stocks that fall below fifty cents.

Others consider a true penny stock to be a stock worth less than one dollar that’s trading off of a major stock exchange. Again, it all depends on who you ask because officially, it doesn’t matter if the stock is on a major exchange because the defining element is the price of the stock, not where it’s being traded.

Penny stocks are sometimes called differently. Day traders and investors use that term interchangeably with terms such as nano, micro, and small caps. It is usually companies with small capitalization amounts that offer penny stocks.

You can invest in penny stocks with a small initial investment, but you usually have less information to go by when it comes to evaluating the company. Larger companies selling more expensive stocks are required to file reports with SEC.

But even though penny stocks don’t afford you that luxury, it’s a way to get in the ground floor of investing with an up-and-coming company that has limitless potential. If you don’t mind to do a little extra research, penny stocks can payoff quite beautifully.

It is possible for you to find out if a penny stock company has made their financial information available to the public. Doing that is better than just believing someone else when they say a company is worth investing into.

If you find anything unusual, such as the auditors haven’t certified a company’s financial statements, then you should be cautious about trading in that stock. You should also worry if the auditors claim the company has no funds to continue operating.

No minimum standards have to be met by penny stock companies in their listings, since they are done on the OTCBB (OTC bulletin board) and the Pink Sheets.

What is the risk of penny stock investing? Even if the initial investment is fairly low, you have less ability to make decisions based on financial history and potential.

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With the cost of living constantly on the rise, a greater number of people are considering investments a necessity. Sadly, other retirement plans, along with social security benefits, no longer seem a reliable source of income, and they are hardly sufficient to keep up with the cost of living.

Investing provides a safety net – a way to ensure that you will have sufficient funds to live comfortably when you retire or stop working one day. But, what type of investment allows you to get good returns without getting too much on the line?

Savings account present little risk, but they are also very flat when it comes to returns. If you have a sum of money you would like to invest – both money that you have saved, and money you have suddenly received as a lump sum – you might want to invest it following different channels. In order to see that money grow, you will want an investment that provides good returns with acceptable risks.

And you don’t only invest for the future, but also for your children’s education fund, or to purchase a luxury item. The type of investment you need largely depends on your financial goal, and of course, investments that bring the largest returns are also those that present the highest risks.

Most financial institutions will be able to advise you on the most appropriate type of investment for your future needs. Saving for a college education is a shorter term investment than saving for retirement. You are probably still going to be employed while your kids are getting an education, so even if the risk is a bit higher, it is worth taking it, since the returns will be higher. Your retirement fund should be set up to bring lower returns and have less risks involved.

Investments are made by buying stocks in the stock market. You can try this yourself, but a broker at a financial institution will have a lot more knowledge than you and could be beneficial. A broker should be able to discuss with you which type of investment is best for your needs and your age.

Online trading on the stock market has become quite popular in recent years, as people feel they can trade stocks themselves and not have to pay a ‘middle-man’ fees to do it for them. It is okay for you to buy and sell stocks if you know the stock market, or if you at least don’t mind to learn about the stock market, but ultimately it is best to leave the job of buying and selling stocks to people that know what they are doing.

Whatever method you choose, make sure that you fully understand what type of investment you are making, what returns you can expect, and what guarantees are in place. Unfortunately, too many people have lost everything they had because of investing in stocks that were too risky but promised high returns. Stay away from investments that sound too good.

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We have all heard the advantages of investing in a mutual fund over trying to pick individual stocks. First of all mutual funds hire professional analysts that are market experts and devout many hours of study to the various stocks. Unless you want to devout a large portion of your free time to the study of the financial reports, you probably won’t have as much information to make a decision as a mutual fund manager.

You also shouldn’t forget the well documented advantage of diversification. By holding several non correlated investments, risk is reduced. Put simply, some go up, some go down and combined, the return levels off the fluctuations, or risk.

Finally, a mutual fund offers smaller investors a chance to invest in small increments rather than having to save a large chunk of cash to purchase 100 shares of stock.

Because of all the advantages, it’s not really surprising that mutual funds have become a very popular form of investing. Now there are thousands of mutual funds to choose from, so how does one make a selection? Try to consider these few tips:

Jumping on the recently performing best fund is what you need to avoid. It may seem like the safe and rational thing to do, but like individual stocks, you want to buy low and sell high, not buy high and pray for more growth.

It’s likely that good funds may not be enough to overcome the force of the overall market. Funds that can exceed the broad market without increasing the risk is what you should be looking for. Risk parameters are what each fund has and they are required to follow it. To understand what these are, you need to read the prospectus closely.

Make sure that the number of funds that you own are limited. Diversifying into many mutual funds will not increase your return by much nor will it reduce your risk unless you are trying to simply achieve the same returns as the broad market.

Funds that become too popular and too big tend to slip in performance. This is due to several reasons.

The type of fund being totally dependent on your investment objectives is one final point you need to keep in mind. Designed for your objectives are certain funds and these can either be for retirement, growth, income, funding the kids college, etc.

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Because they don’t meet listing requirements it is highly unlikely that you will ever see them at the major exchanges like NASDAQ or the New York Stock Exchange. Listed stock must meet certain requirements, such as: a minimum number of shareholders, minimum assets and filing of financial reports regularly. These stocks are also under the close supervision of the SEC, the Securities and Exchange Commission.

You will normally find the penny stocks on the OTCBB or on the pink slips. The OTC Bulletin Board is an electronic system that is specifically designed for the sale of over-the-counter securities, such as penny stocks, that are not listed on any national stock exchange. The only require is that the SEC receives financial reports from these companies. If the company fails to do so then their listing is removed from the OTBB and they are only quoted in the Pink Sheets. The activities of the Pink Sheets are neither monitored nor regulated by the SEC.

No filings need to be done for a company whose total assets are less than $10 million or if they have less than 500 shareholders.

As they are, penny stocks are wide open to manipulation and scams. As many of the companies in the penny stocks are very small, their capitalization is very small and their stock price is usually well below $5. The lack of reporting requirements on penny stocks can make it difficult for potential investors to any information about the company.

Many fraudsters will take advantage of this lack of reporting and publish misleading information to manipulate their stock prices. Because of a lack of public interest and small numbers of shareholders there is generally not very much trading going on. This means that just a few buy or sell orders can drastically change a stocks share price.

The low liquidity of penny or micro-cap stocks are their biggest advantage. Whilst a listed stock can never move in great leaps and bounds penny stocks go that often. The low share price allows you to buy multiple shares in the company with very little money. So it is easy to see that a little change in price either up or down will have a big impact on the performance of your shares.

With low share prices and no need for vast sums of money to start up penny stock trading might seem like the best place for rookies traders, but in reality it is a playing ground much more suited to the more experienced investors. Penny stocks are always high risk. Many of the investments will not work out as the company goes bankrupt. This will result in all the shares you bought being worth absolutely nothing.

Many penny stock companies have little or no working capital, assets or they are still in the development stages and it can be months or even years before they expect and revenue. Because of the low liquidity of penny stocks you may need to wait for days or even weeks before you can sell your shares without discounting them.

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