In the next set of articles I am going to focus on investing in penny stocks. I thought this article could serve as an introduction to a penny stock. First off, what is a penny stock? Common stock of small and often relatively new public companies that have a price of a dollar or less are referred to as penny stocks. Interestingly, penny stocks are not going to trade at a penny and they actually maybe priced as much as $5. But even then, they are a great way to start investing.

One thing to watch out for with these hot penny stocks are pump and dump schemes. Companies that issue the stock or other organizations that have a stake in these companies engage in these schemes to manipulate the price. They are able to do this because penny stocks are traded infrequently and in low volumes as well. The tactic they use is to drive a lot of interest towards a penny stock by utilizing press releases, advertisements on the internet and other marketing methods. But this is done after the individual or company purchases a lot of shares usually in the hundreds of thousands and sometimes even in the millions.

The problem with penny stock companies is they are not easy to sell and the stock price can fall pretty quickly and be worth next to nothing. A famous example during the dot-com era was the case of the then 15-year old named Jonathan Lebed. He purchased penny stocks and talked about how they kept appreciating on the message boards. He was then able to sell his shares at the expense of other investors. I will give you some advice in the next posts that will familiarize you with penny stock companies and the various nuances involved in penny stock trading.

A rule of thumb is to have about ten percent of your investment portfolio in penny stocks because many stock experts have stated that a large majority – up to 40 percent- of investors have lost money on penny stocks.