How to Invest in Penny Stocks

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With double- and triple-digit gains possible in just one day, it pays to know how to invest in penny stocks.

how to invest in penny stocks

Just look at Luna Innovations Inc. (Nasdaq: LUNA). Today (Wednesday) the stock jumped 89.39% to $2.50.

And some of the top penny stocks profiled in Money Morning last year gave investors gains of 440%, 231%, and 214%.

Investing in penny stocks isn't for everyone, as they operate differently than the typical stock.

Known for wide price spreads, light volume, and reduced reporting standards, penny stocks are typically traded on the over-the-counter market instead of major exchanges such as the New York Stock Exchange. For these reasons, penny stocks are deemed speculative investments.

The U.S. Securities and Exchange Commission warns "investors in penny stocks should be prepared for the possibility that they may lose their whole investment."

However, there are plenty of legitimate and lucrative penny stocks, if you know how to invest. The key is finding the promising ones and steering clear of the rest.

How to Invest in Penny Stocks: A Primer

Before investing in penny stocks, first and foremost, it's imperative to understand the risks. Then, a little bit of groundwork can pay off by helping you avoid big pitfalls.

Here are the first six must-take steps for how to invest in penny stocks:

  • Verify the Source: Mailboxes and inboxes are frequently flooded with a flurry of penny stock investment opportunities. Researching both the touted company as well as who is doing the promoting can save you a bundle. Thanks to the worldwide web, it's easy to verify flaunted claims and determine if a stock has potential.
  • Find the Financials: Like scores of growth companies, many penny stocks have never turned a profit. But more important than profit when mulling a penny stock investment is the quality and frequency of financial statements. Look at the auditing firm, published dates, and health of the company and read all the asterisks. If you uncover any red flags, don't invest.

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