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Trading penny stocks can be quick and easy for experienced investors, but those who are new to the game may want to pick their stocks list carefully. Investing in penny shares has a lot of different pros and cons. Risk and reward go hand in hand, but no more so than the world of the volatile tiny stock market. When choosing which stocks to go with, keep these pros and cons in mind so that you can make the right investment call.

The Pros:

Potential. Penny shares have a lot of them. Large companies, like Microsoft, were once a very small stocks. Companies that are starting at the ground floor begin as tiny stocks more often than not, and those that have an exciting new technology or product will quickly rise. If you’re looking for a way to rise with the giants, then penny stocks do have the potential to do so.

Better Rewards. Penny shares also have the potential to provide better rewards compared to the risks involved. While traditionally traded stocks offer a great deal of incentive, such as security and experience of the market, penny shares can often mean a softer “hit” if the stock doesn’t perform up to your expectations. On the other hand, if you’re invested in a company that has $14 per share, and then that drops to $4, you’re likely to lose tens to hundreds of thousands of dollars. Some investors lose millions. It isn’t likely to happen with small stocks, as long as you invest wisely.

Fast Turnaround. The values of such tiny stock can go up within a single trading day. Some stocks take years to see the same gains as penny stocks do.

The Cons:

Active Traders Required. If you don’t have the time to invest into making fast, quick trades, then penny stocks may not be suitable for you. Investors who aren’t quick on the ball may miss an opportunity to sell whenever a stock does go high, and as a result, will hold onto it until the profit shrinks or vanishes entirely. Invest only if you are an active traders.

Thin Trading. This type of stocks are thinly traded, which provides some measure of security for the investor, but which top penny stocks also leads to sharp declines in value as well. Choose your stocks carefully.

Humble Starts. Most penny shares are in small businesses. While Microsoft did begin as a small stock, a majority of these companies may not become profitable for some time. Sometime it may take years for it to grow.

What are penny stocks?

Ask some investors what a stock selling below five dollars is and they’ll usually say that it is a penny stock. This term is can be vague at times but it is not difficult to understand. However the fuller definition of penny stocks brings up a business’s aggregated value of all it’s currently outstanding stock shares, which is more commonly known as its market capitalization value instead of its share value. Even so, there is no definite word that totally specifies a penny stock.

To determine the market capitalization value of a business (the market cap), you essentially must multiply the share cost of the business by the quantity of shares of the company that are currently outstanding. By carrying out this kind of computation you can determine what the complete dollar values of all the shares of the company in any given period of time. Penny stocks are not traded on the stock exchanges like most other stocks, but instead they are traded in the over-the-counter (OTC) marketplace. For most penny stocks trading an broker will act on the investors behalf and set up a deal immediately between the investor and a the third party or parties. The broker can then receive a commission for helping complete the trade.

A large amount of all penny stock transactions are billed by the brokers as principle transactions. That means that the brokers are not compensated any commission but instead make their profit on the spreads, and by buying and selling at beneficial moments. There is definitely no single price at which all penny stocks are bought and sold, but rather there is a number of diverse prices. The difference between the bid value and ask price is called the spread. The spread of numerous penny stocks is commonly about 25-33% but can frequently be 50-100% or even greater. There are always two bid values and two ask prices, and those are called the inside and outside bids and ask prices. Remember that it’s the outside bids and ask that has the most interest. Penny stocks are likewise subject to mark up pricing. That is where the agent has held the penny stock in their account and has consequently taken much of the risk connected with market value fluctuation.

In general, if you want to give top penny stocks yourself the best chance of making money with penny stock investing, then it is important that you use a system that can tell you exactly what are the good penny stocks to invest in. Why invest in stocks if you do not know which ones to buy? And don’t worry about how to invest in stocks and bonds, once you know how penny stocks work you won’t need other kinds of investment methods, although diversification is always nice. Make sure that the system you use makes it easy to determine where to find penny stocks that are smart stocks to invest in. This is important.

As you probably already know, penny stock investing is very risky. In fact, it is probably the most dangerous investing method of all. And it is also very profitable. Nothing beats being an owner of a stock, whose share price went from $0.12 to $22 in a few weeks. But not every penny stock trading is the same. There are as many techniques as there are investors, though we can identify three major strategies that are the most common. You definitely should consider choosing one of them, and then refining it further to match your trading style.

1. Cheap Stocks On Major Stock Exchanges

By common definition the shares of penny stocks are trading below $5. There are really many stocks like that on major stock exchanges, like the New York Stock Exchange (NYSE), NASDAQ or AMEX. Trading these penny stocks is just as safe as trading any stock on these exchanges. Stocks listed on major exchanges have to undergo very strict reporting requirements, so you can be sure those companies mean business. They are not some shell companies started for whatever dubious reasons, but established businesses with a past and a future.

All this may seem safe enough, or at least not riskier than regular stock trading. However you have to consider one major drawback before deciding to follow the path of trading cheap stocks on major stock exchanges.

Companies that want to be listed on NYSE, NASDAQ or AMEX have to pay astronomical listing fees. So, penny stocks you find on these exchanges are probably not small companies just starting out in hopes of making it big. Most probably they are once large companies, whose share price plummeted because of financial troubles or some other dire reasons. Just take Sprint (S) for example, listed on the NYSE. In the year 2000, at the peak of the dot-com craze, the share price of Sprint went to $75, only to reach the lows of $2 in 2012. As of October, 2014 it is trading at around $6.

Your main job when utilizing this method is to find out why a certain penny stock is trading on such a low share price. You have to believe in your chosen stock, that despite the bad times it can still soar in the future.

2. Stocks On Over-The-Counter Markets and Pink Sheets

On over-the-counter (OTC) markets and Pink Sheets you won’t find companies that were once big but have fallen from grace. These penny stocks are usually really small startups with a share price below $1. There are thousands of them, and you cannot ignore the research necessary to filter out those 95% of them which are useless. OTC penny stocks have other kinds of risks altogether.

They are extremely illiquid. Not many shares are traded daily, so if you buy a stock on an OTC market, later you may find yourself in a position that you simply cannot sell it for profit, because of the low volume and a large spread between the bid and the ask price. You won’t be able to find a buyer.

The other risk is that the great majority of stocks on OTC markets are really low quality, junk stocks, and only a few of them are worth further research. Knowing how to find the good ones is the key point.

3. Ride The Pump And Dump

This is unquestionably the most top penny stocks dangerous strategy. Penny stock trading gets all the bad press primarily because of the pump-and dump schemes.

Pump-and-dump is a very common and unethical (even criminal) activity where scammers buy up the majority of shares of a low quality OTC penny stock, and then they promote it heavily, so that gullible investors buy the stock too, thereby driving up the share price. When the share price has rocketed, the fraudsters simply sell their shares, causing the immediate collapse of the share price, leaving the investors with a worthless penny stock, unable to recover.

The question then is can you profit exploiting this fraudulent activity. There are two ways. The first way is probably unethical, but the second way will make you the king of penny stock trading.

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