Ever wonder what penny stocks are, and weather they really cost a penny? Read on.

In the days of the past, penny stocks often did cost only a penny a share. Today, any stock selling for less than $5 or so per share might be considered a penny stock. They often represent companies with less-than-stellar track records that nonetheless promise great success around the corner. (Revolutionary oil-deposit! A cure for the common cold!)

Penny stocks are dangerous, because people think that low prices means bargains, and assume that they'd be better off spending their $500 on 300 shares of a penny stock than on 20 shares of , say, Microsoft.(NYSE:MSFT)

Believe it or not, a stock might be grossly overvalued at $1.50 per share, but significantly undervalued at $150 per share. Many people don't understand this.and they often gravitate toward the $1.50 stock, thinking it will more quickly double in value. That's a risky assumption ,though. Your performance when holding a stock really depends on the stocks intrinsic value not its trading price. the price at which you buy into the stock, and the amount of money you invest, not the number of shares you own.

Lets imagine that you buy 100 shares of a $0.60 stock and one share of a $60 stock.You would spend $60 for each investment. (This is an example,with commission costs disregarded.) If each investment doubles in value, you'll have 100 shares of a $1.20 stock, worth $120, and one share of a $120 stock, worth $120. You would have gained no advantage by buying the lower-priced stock. A $60 or $20 or $100 stock is more likely to double in value- and hold its value for the long term- than a typical penny stock is. Most penny stocks are selling for a low price for a reason. They occasionally get hyped and soar briefly, but they usually plummet back to earth.

Reminding investors that many micro-cap companies, especially those traded outside the bright lights of the New York Stock Exchange, Nasdaq, or American Stock Exchange, can be risky propositions - or even outright frauds- The occasional shower of pennies from heaven might do our bank accounts some good. For penny stocks. They're often subject to manipulation and deceit, making it hard for investors to separate the good offering from the not so good.

Having said the above, It's true that penny stocks can have a huge returns, The main reason to buy a penny stock is because your hoping for a high return. Because they are cheap, most people are able to purchase a large number of shares, thus if you receive a high return on your investment., you will make considerable amount of money. For example, If you buy 100,000 shares for $0.10 each, which means you invested a total of $10,000. You decide to sell your penny stocks for $0.40 each, which means you just earned 4 times what you invested and gained a profit of $30,000. That is quite a return on your investment! Therefore, the key to purchasing penny stocks is get in and get ahead of of investors.

In order to ensure that the penny stocks you are planning to buy have a high probability of return of investment, be sure to look for companies in which their sales are steadily growing because this means that their profits are steadily rising, too. Also, invest in penny stocks only if the company has an honorable executive team in which expansion is one of their main priorities, that way, you can ensure that a certain company will stay in the stock market. With all these characteristics in place, a solid business foundation is established, therefore, an increase in the price per share of penny stocks is almost inevitably going to increase.

Another important aspect of penny stocks is to buy them when the company is new and in the early stages of business development, especially if you feel the company is going to have a great success.Think about when Microsoft was just starting out and they sold penny stocks for $2.50 per share. What if you bought 100 shares of that penny stock? The money that you used to purchase your penny stocks was actually used by the Microsoft corporation to help them expand their business. Thus, due to the fact that Microsoft has exploded into a large, corporate entity, your penny stocks would be worth thousands.

With penny stocks, it is all about timing and the expansion of the business in which you purchase stocks.

Please remember that penny stocks are a major high-risk investment.

Conclusion, trading penny stocks is certainly not for all investors. But it might be just right for those who are looking for something off the well-worn investment or trading paths. Just don't bet too much on it.