Firstly let's begin by understanding what exactly a Penny Stock is and how they are traded. They come up a lot when doing research about investing and advertising would have a new investor believe they have the potential to make someone a lot of money out of very little. In some cases, that can be true since they generally trade for under $5 with low market capitalization, but often times penny stocks, which are traded outside of the major market exchanges, are tricky to regulate and have a history of being wrought with fraud.

Are They Safe?
They are commonly regarded as highly speculative and high risk as a result of their lack of liquidity, large bid-ask spreads, small capitalization and the few disclosure requirements they are subject to. Some of these stocks have become more legitimate in recent years as a result of the new owner of the Pink Sheets. These stocks are usually traded on the Pink Sheets or the Over the Counter Bulletin. The Pink Sheets now require that the filings for these micro cap stocks be taken online where they are subject to greater accountability. Prior to this, records of penny stocks existed only on paper.

The name does not imply that a stock trades for 1 cent since there is some debate on what can be considered a penny stock. Some investors consider a selected stock trading for under $5 a penny stock while others believe the term refers to stocks trading for under $1. Typically these stocks are from tiny companies with speculative shares that is not required to file as exhausting disclosures, filings or meet as many regulatory standards as those trading on the more established exchanges.

The Pink Sheets was first established in the early part of the 20th century as the National Quotation Bureau, but now is known as OTC Markets Group. The company reported and published listings and quotes for tradable securities. The publications got their names from the color of paper they were printed on, both Yellow and Pink Sheets.

Technically, Pink Sheets is not an actual stock exchange, but a means for qualified independent brokers to exchange securities. Generally, it is now known as a platform to trade penny stocks, and other micro cap stocks, which is stock of public companies which have a market capitalization of roughly $300 million or less.

While most companies quoted by Pink Sheets do not file financial reports with the Securities and Exchange Commission SEC, the companies listed in the Pink Sheets OTCQX tier provide substantial disclosure to the marketplace, and are considered to be the top tier of the over-the-counter OTC market. The rest of the tiers, ranked from highest to lowest based on the amount of information they make available to the market, are as follows:
OTCQBCurrent InformationLimited InformationNo InformationCaveat Emptor

Blue Chips on OTCQX

While most companies quoted in the Pink Sheets tend to be small companies that trade at low volume, not all of them are penny stocks. Companies in the OTCQX and OTCQB tiers are worthy of investor consideration even though they are micro cap stocks, and include larger, well-known companies like Roche, Adidas, and Deutsche Telekom.

Pink Sheets Penny Stocks

Most of the companies below the "Current Information" tier of the Pink Sheets are generally penny stocks and micro cap stocks that do not meet the minimum listing requirements for trading on the major U.S. exchanges, might be close to bankruptcy and are typically seen as riskier investments.

In fact, micro cap stocks and penny stocks are notorious for their volatility. They can also be affected by price manipulation and it may be extremely difficult to liquidate bought positions of both penny stocks and micro cap stocks.

Investors, however, should not be turned off to the investment opportunities of the Pink Sheets, as there are many good companies to be found among the penny stocks and the micro cap stocks. Be aware, however, of scams, and do diligent research before buying.

Equities Editorial Desk
http://www.equities.com/

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Penny stocks are a high risk but certainly high reward investment. When you pick a winner and the shares begin moving, gains can increase hundreds of percentage points. Of course you can lose as well. Picking winners is simply a matter of analyzing the right aspects of each company you want to invest in.

So just how do you find these great picks? If you will be doing your own research these 3 basic fundamental parameters are important in determining if you should pursue a penny stock further.

1. Company Should Have Increasing Revenues

Look for: Quarter over quarter increasing revenue shows that a company has a strong operational plan. Perhaps they are gaining market share. This is a good sign. This information is easily found on the companies financial statement. A bad sign is when a company has expenses increasing as revenues increase, or simply decreasing revenues.

2. Company Should Have Improving Earnings

Look for: A good sign is positive net earnings for consecutive quarters..the more the better. Earnings simply measures the amount a company makes above what it spends in operation costs. Only about 15% of penny stocks actually have positive earnings after all the smoke clears. This is net earnings were talking about...not earnings before interest, taxes, deductions and amortization.

3. Company Should Have a Competitive Advantage.

Look for: Companies that have an overwhelming advantage in their niche or industry whether in operations, supply chain /distribution, location, or intellectual capital. A good sign is if the advantage is sustainable and not easily duplicated.

If you don't like to research you can use a stock picking service that has a strong track record and is reliable and accurate. I would recommend tracking the picks you receive before spending any of your own money.

Believe me, whichever way you choose, whether you do your own research or use a penny stock picking service, revenues, improving earnings and competitive advantage are critical to making money in penny stocks.

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