You already know trading penny stocks can be extremely lucrative, but it can also be extremely risky.
What you might not know is that you can limit the risk by following three important rules.
You see, most traders buy penny stocks without knowing if the company they invested in has real profit potential.
Not only is this unwise – it can cost you your entire investment.
In order to help you identify the most profitable penny stocks to own, we're showing you the three rules for trading penny stocks that will help you pick small companies with real profit potential.
In fact, our favorite penny stock to buy right now is a perfect example of these rules in action…
Trading Penny Stocks Rule, No. 3: Stick to Penny Stocks with Great Growth Potential
We've all heard that penny stocks can generate triple-digit gains for shareholders in a matter of days.
Sure, they can. But very few actually do.
The fact is that most penny stocks lack the strong financials necessary for the kinds of returns we're looking for.
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Take VistaGen Therapeutics Inc. (Nasdaq: VTGN) as an example.
Last December, this biotechnology company won discretionary approval from the FDA for an anti-depression drug it was developing.
Eager investors, believing that a profit was inevitable, bought into VistaGen's stock, pushing its price from $0.92 to $2.55 – a staggering gain of 177%.
However, VistaGen's temporary breakthrough was not enough to sustain this kind of growth.
Over the next two weeks, the stock pulled back to $1.08, leaving investors who bought at $2.55 with an almost 60% loss.
VistaGen is a great example of what happens with most penny stocks, even the stocks that soar. Lacking real growth potential, they end up burning investors who piled on without a second thought.
That's why it's important to stick to penny stocks with the kind of financial health that can generate the great returns we're looking for. Make sure the underlying businesses are healthy, profitable, have the ability to compete in their market space, and whose executives are invested in the company.
It's also the reason you need to follow this next rule…
Trading Penny Stocks Rule, No. 2: Steer Clear of "Quick Returns" Promises
Investors who are new to penny stocks often believe these little-known companies are "guaranteed" to provide triple-digit returns simply because they're listed on an exchange.
This just isn't the case.
While some investors get lucky and identify a penny stock right before it jumps on a sudden development, most penny stocks stay flat or fall and become worthless.
As a result, you could be left with an empty wallet and no returns to show for it anytime soon.
So don't bank on striking it lucky with penny stocks, and avoid promoters and scam artists promising overnight gains if you buy the stock they're hawking.
In fact, most penny stock investors end up doing this repeatedly due to one common misconception…
Trading Penny Stocks Rule, No. 1: Avoid Risky Penny Stocks
When researching the best penny stocks, you'll often hear that penny stocks only have profit potential because they are so risky.
While risk plays a role in determining a stock's profitability, the truth for penny stocks is a little more complex.
You see, the less risky a penny stock is, the greater chance it has of providing shareholder with the kind of gains that define a worthwhile investment.
That's because a penny stock with strong underlying financials and plenty of opportunity for growth is, by default, not a risky investment. In fact, these are the kind of investments smart investors look for every day, no matter how much they cost.
Thankfully, penny stocks that meet these rules are easy to find if you use the Money Morning Stock VQScore™ system.
The VQScore system weeds out the unprofitable, speculative companies that clutter up the market and leaves behind the few with serious growth potential.
And it's uncovered this $2 stock with the potential to double your money…