Peter Leeds

Many excellent companies trade as penny stocks, and investing in those companies as they “grow up” to become bigger stocks can be extremely lucrative. Unfortunately, penny stocks have been given a bad name among the investment community, and in some cases, that negative reputation is well deserved. But after you discover a few tactics for sidestepping the easily avoidable pitfalls in penny stocks, you can uncover incredible companies that will turn a small investment into a significant reward.

A penny stock is a small company's stock that trades via over-the-counter (OTC) transactions for less than $5 per share. A few consistent traits often indicate that a penny stock has a bright future ahead. You can use these hints to assess a stock quickly, and they can serve as valuable analysis tools for investments of any size.

In penny stocks, a picture is worth a thousand words. Trading charts display a penny stock's price — and usually trading volume — over time, in chart format. You can choose the duration of time and see how the price performed over a day, week, months, a year, or even longer.You can view trading charts for free from your broker and on numerous websites, including Big Charts, and the financial websites referenced in the preceding section.

Stock quotes tell you at what price the shares most recently traded. More important than knowing the latest price is to keep an eye on changes in price by tracking stock quotes over time.For example, a stock quote of 50¢ per share only tells you the price at which the stock most recently traded. But if you also know that it traded at 25¢ the day before, you know that the shares have doubled in a short time.

Small businesses are the source of the majority of economic growth in the United States, and this is probably true in most nations worldwide. In addition, the small-business sector is America's largest employer.When small businesses need to raise capital, they often go public by listing stock on the market. Some of these companies are tiny, or just getting started, and their value is still low, so they often trade as penny stocks.

To understand types of trading orders and how to use them, you need to know how stocks are bought and sold. When you buy or sell shares of any type of stock, you choose between two main types of orders: Limit orders Market orders Understanding the two types of orders is important for trading any type of equity, but the distinction is particularly significant when it comes to penny stocks.

Your contact at the penny stock company will usually (but not always) be very optimistic for the company's prospects. Take her hopes and expectations with a grain of salt. Instead of trusting everything she tells you, try to delve into her answers to glean what she is really saying.If she says that the penny stock company is growing rapidly, but also says that the headcount is half what it was a year ago, then something does not make sense.

You will get the best results from your phone call to a penny stock company if you ask the best questions. Avoid dead-end and vague queries, and instead ask focused questions that require the contact to answer with specific, detailed answers.Some examples of great questions that you should ask management or IR personnel include the following: What is the current headcount at your company?