Our Guide to Investing in Penny Stocks Today - Plus Our Top Picks

Penny stocks can sometimes deliver massive returns to investors. Newer investors keep coming back to them because of their potential to produce 300%-plus returns in just a few days.

Marathon Patent Group Inc. (Nasdaq: MARA) is just one example of a stock that climbed an astounding 319%, from $1.42 to $5.95, in only four days during the short week of Thanksgiving.

That's enough to turn a small $1,000 stake into $3,190 - for profits of $2,190 - in just four days. An impressive gain to be sure.

But not all penny stocks pay off for investors.

Another penny stock, VistaGen Therapeutics Inc.(Nasdaq: VTGN), climbed from $0.92 to $2.55 on Dec. 6. Less than two weeks later, on Dec. 15, the stock had returned to $1.05. Anyone who purchased shares at $2.55 ended up being stuck with losses of roughly 58%.

It's important to understand that many penny stocks aren't quality investments. Unfortunately, not all penny stocks can be among the most successful,  top penny stocks. Ultimately, if they trade at a couple pennies, then there's probably a good reason for that.

Penny stock investing comes with high risk if you don't know what you're doing. Before you invest, ask yourself if you truly understand what are penny stocks in the grand scheme of my financial portfolio?

Bottom line, don't put too many of your eggs in this one basket. Unfortunately, there are hundreds of scammers waiting to pounce on unsuspecting investors who put too much of their savings into a manipulated or entirely bogus shell company.

Unfortunately, scams are very prevalent. Shell companies make it appear like they are raking in revenue when they have no incoming money at all. Scammers will artificially inflate the price of shares, only to sell their own shares once unwitting investors have bought in. Plus, stocks that trade on over-the-counter exchanges aren't held to the same standards as stocks trading on major exchanges like the NYSE and Nasdaq.

So to help you find the top penny stocks to buy in 2018, we've developed our own criteria to uncover penny stocks with the most potential.

And today, we'll reveal our how-to guide for investors looking to book the most profits possible from penny stocks in 2018.

These are our four top tips, as well as the five best penny stocks to buy today...

Tip No. 1 When Buying Penny Stocks: First Look at the Major Exchanges

Many of the penny stocks you'll find trade on the Over-the-Counter Bulletin Board (OTCBB) or on the pink sheets. These penny stocks can be very risky.

Stocks listed on the OTCBB don't meet the requirements to be listed on the NYSE or Nasdaq, however they still file with the SEC and report financial performance.

Stocks on the pink sheets, on the other hand, have no minimum requirement and do not need to file with the SEC.

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Unless you are willing to take on major risk, it's best to stick to penny stocks which trade on the NYSE or Nasdaq exchanges. Your list of penny stocks to buy will be narrower, but you'll also significantly reduce your risk of buying stock in a shell company.

If you do end up wanting to invest in a penny stock on the pink sheets, then you can use their classification system. The pink sheets do have categories of stocks held to higher reporting standards. Those categories are known as "PrimeOX" and "PremierOX."

Tip No. 2 for Buying Penny Stocks: Look for Positive Analyst Coverage and Bullish Price Targets

After you've narrowed down your universe of penny stocks, start to look for those companies currently receiving positive analyst coverage.

While a high price target doesn't necessarily mean it will come true, if a large investment firm is covering a penny stock, it usually means that stock has more promise than one that has no analyst coverage.

Then, look only at stocks with ratings of "buy" or "hold" and that have price targets above their current price.

Again, a high price target isn't a guarantee. But it is an indication of a stock's potential gain over the next 12 months.

For instance, you shouldn't buy a penny stock which has a price target that only implies upside of 15% when another penny stock might have a price target which implies upside of 150% with the same downside risk.

Tip No. 3 on Buying Penny Stocks: Look for Buyout Targets or Those "Ready for the Market"

One of the biggest catalysts for penny stocks can be a new product or drug that is about the hit the market. If it's successful, there's good chance the stock will soar.

Money Morning Director of Technology & Venture Capital Research Michael Robinson said that many companies with shares priced in penny stock territory - like some biotechnology companies or innovative tech companies - sometimes spend years on research and development (R&D) for their products, which is why they might not yet have sales or profits.

But if all that R&D ends up creating a successful new product or drug, a penny stock can rapidly enter the expansion phase of the business life cycle and start delivering massive sales, and then profit growth.

Another catalyst that Robinson points out is a potential buyout. Penny stocks that end up being bought out are often the biggest winners.

Robinson said these top buyout candidates are often penny stocks. They're the kind with a market niche, new proprietary technology, a promising drug or product - and a larger competitor that wants to absorb the niche. When the purchase price is above the price where shares trade, investors get an immediate gain.

Snagging that penny stock that's about to be acquired is one of the quickest ways to find triple-digit returns. Robinson recommends keeping up with the trends in mergers and acquisitions to find industries with the most takeover activity.

Tip No. 4 When Buying Penny Stocks: Budget

Lastly, it's crucial that investors keep the right perspective. Allocating too much of your capital to penny stocks can be a recipe for disaster.

Betting on long shots is a poor strategy. Sure, the potential payouts may be higher on long shots, but they're long shots for a reason. Rarely do they return the types of profits investors hope for.

Successful penny stock investing is not akin to buying lottery tickets. But if you treat them like any other investment, you can make market-beating profits.

Now that we've covered all the tips and tricks to investing in penny stocks, here are our five top penny stock picks...

Penny Stocks #5: Second Sight Medical Products Inc.

Second Sight Medical Products Inc. (Nasdaq: EYES) is a Los Angeles-based medical device company creating prosthetics to restore vision to blind people.

On Dec. 5, the company announced it had entered the market in Iran by implanting two patients with its Argus II Retinal Prosthesis System. This is part of the company's strategy to target leading eye centers and distributors around the world, according to CEO Will McGuire.

McGuire hopes the adoption of this technology in more places around the globe will mean that the technology is becoming increasingly accepted, which therefore increases demand.

And it seems at least one analyst shares McGuire's optimism. H.C. Wainwright & Co. analyst Amit Dayal maintains a $5 price target for EYES shares. That represents upside of 159% from where the stock currently trades, at $1.93.

Penny Stocks #4: Zix Corporation (ZIXI)

Zix is one of the tech company penny stocks you should consider. Zix, an email provider, focuses on secure messaging. They market themselves specifically to government entities.

The unique qualities of Zix are their approach to encryption and download avoidance techniques.

Zix sales have gone up 65% over the last 5 years. With this kind of growth, you should definitely be watching and strategizing your investment.

This penny stock surpasses $5 per share periodically and is should good gains in year-to-date reviews.

This company is pretty small giving it a market cap of $296 million.

As data breaches and privacy concerns fill the news and the minds of the consumer, this company is sure to gain traction. We don't think people are going to lose interest in cybersecurity anytime soon.

Zix has plenty of room to continue to grow. Take on the risk of this low-priced stock now and reap the rewards later.

Penny Stocks #3: Zynga Inc. (ZNGA)

Often penny stocks are companies that investors haven't ever heard of in the real world. Not this one.

If you've ever played Farmville on Facebook or games on other mobile platforms or social networks, it was probably hosted by Zynga.

This company increased their sales by 16% in 2017. With 1,555 employees, they churn out $554,000 in revenue per employee. That's staggering.

Zynga has the opportunity to grow as the use of mobile and social networks grows. We don't think that will be stopping anytime soon.

Jump on now to get hold of stock for this company that's quietly growing and turning out a profit. Zynga ranks among our top penny stocks to consider.

Penny Stocks #2: Glu Mobile Inc. (GLUU)

Another gaming company to watch is Glu Mobile. The name says it all, this company creates games for smartphones. Multiple of their games are getting popular and recognized by phone and tablet users.

It's the biggest selling game? Not the ones based on video game shooters. It's a game based off of the life of TV star Kim Kardashian.

Glu stands out in the gaming industry by not focusing solely on male gamers. This company creates products that are intended for female gamers. And, approximately two-thirds of their revenue comes from these products.

Glu Mobile's finances are looking pretty good right now. They've paid off their debt and are building some cash reserves. They're even narrowing their losses, with revenues rising over the last 4 quarters.

With their next hit game, the stock could skyrocket. Get in before they produce a bestseller.

Penny Stocks #1: AmeriServ Financial, Inc. (ASRV)

AmeriServ is a bank holding company. Their revenue might not sound like much numerically, but, it's high enough to enable dividend payments and share buy-backs.

Recently, AmeriServ stock has seen a 25.6% increase in a quarter over quarter comparison.

AmeriServ is well position to take off with their mountains of cash reserves and P/E ratio of 18.7.

Company insiders hold about 10% of the stock while institutional investors own 39%. We think those numbers are looking prime for you to invest in AmeriServ. Jump on before everyone else does and the prices take off.

Are Penny Stocks Good Investments?

Yes, penny stocks can be good investments, because their low price sometimes means incredibly high upside potential. But every investor should be able to identify the signs of a bad or high-risk penny stock. These signs include a company's use of paid promotions, refusal to disclose important financial information, and listing on a non-major exchange.

What Penny Stocks Should I Buy?

Investors should only buy penny stocks that trade on a major stock exchange, like the NYSE or Nasdaq. Penny stocks listed on these exchanges are less risky, because they have stringent requirements for financial reporting compared to lesser-known exchanges. In other words, these companies can't rip off investors because they have to release quarterly earnings that gauge their financial health. These earnings are considered "report cards," because they track performance metrics like revenue and operating costs. This doesn't mean guaranteed profit, but it is a sign your penny stock isn't a scam.

Penny stocks aren't inherently riskier to invest in than other stocks-as long as you are watching out for the potential pitfalls. Choosing penny stocks that are listed on a major stock exchange will help protect your investment.

Risk is always present in investment, you have to be comfortable with that. But, a smart investor looks to reduce those risks where possible. It's also smart to consider what are penny stocks in terms of your overall financial investment portfolio and invest in them accordingly.

If you're interested in penny stocks, you might also be interested in investing in silver. Check out what the investment opportunities with silver are today.

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