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Penny stocks are referred to as those stocks that are not traded on any of the major exchanges (AMEX, NASDAQ, NYSE). They are low-priced, speculative securities from small companies usually traded by an "over the counter" listing service or initial public offerings (IBO), such as (OTCBB or Pink Sheets) The beginner investor may find other terms used that are interchangeable with "penny stock", they are: microcap stocks, nano caps and small caps.

These stocks are a high-risk investment and beginner stock investors should be prepared to lose their entire investment. The stocks are usually capped under $500M and are speculative in nature especially those that are traded under low volumes in "over the counter" listings. The Securities and Exchange commission puts out a warning to those who wish to trade in them that "Penny stocks may trade infrequently, which means that it may be difficult to sell these shares once you own them." To add to the misery, they can also be difficult to get accurate pricing per share.

Why would the beginner stock investor find them attractive$%: Mainly due to their low purchase prices and the potential for rapid growth that may be seen in just a few days. They can and often are a "trap" to lure the novice investor when the stock begins to move up and rumors in chat rooms begin to multiply about their interesting movements. Its very much like an angler moving a worm in the stream for the unwary and hungry fish just below the surface. Think of yourself as that "fish."

The risks involved to the beginning investor beside the "fish scenario"are to purchase a stock of limited liquidity with a background of inadequate or speculative financial reporting with always the spector of fraud that is rampant in this field. Investor beware is an apt expression for the beginner in this field.

The OTC BB (OTC Bulletin Board) is a regulated quotation service in the U.S.A. owned by the NASD, for stocks that are not listed on any of the major U.S. stock exchanges. It can be difficult to distinguish between OTC shares and penny stocks. Many shares that do not meet the capitalization requirements of the major stock exchanges end up on the OTCBB which is why you may find the shares of smaller companies or those who are (IBO) being traded here including penny stocks.

Fraud and the Penny Stock

Quick growth potential makes the area a prime target for fraud in the form of illegal pump and dump schemes, short-and-distort, and chop stocks. The beginner stock investor will need to be aware that fraud is rampant in the form of emails in which stocks are acquired for pennies using Regulation S and then illegally sold to overseas or even domestic retail investors, according to Gary Weiss of "Investors Beware", Business Week (1997).

Summing all this up, beware the lure of quick money offered by these stock hustlers. The only ones making any money are those who make the market and offer them for sale. If you do invest be cautious, be prudent and always do as much due diligence as possible. One of the best suggestions that I have heard when approached by purveyors of these stocks is to run not walk away, Invest in recognized firms that are either NASDAQ, AMEX or NYSE. For these stocks you can usually believe what you are reading.