when considering options for potential investments it s important to have enough information to make an informed decision for some penny stocks information on corporate performance can be very difficult to find when this is the case the information that is available about them may not come from credible sources 
stocks traded on the otcbb carry the ob suffix to their symbol these companies file financial statements with the sec however companies listed on the pink sheets are not required to file with the sec as such these businesses do not receive the same public scrutiny or regulation as the stocks represented on the nyse the nasdaq and other markets stocks on the otcbb and pink sheets do not have to fulfill minimum standard requirements to remain available for sale through otc exchanges once a company can no longer maintain its listing position on one of the major exchanges the company can move to one of the smaller otc listing exchanges minimum standards can act as a safety cushion for some investors when a company is not subject to higher standards investing in that company becomes much riskier many of the companies considered to be penny stocks could be newly formed and some could be approaching bankruptcy these companies will generally have poor track records or no track record at all as you can imagine this lack of historical information makes it difficult to determine a stock s potential stocks that trade infrequently do not have much liquidity as a result it is possible that investors won t be able to sell the stock once it is acquired the investors might need to lower their price until it is considered attractive to another buyer low liquidity levels also provide opportunities for some traders to manipulate stock prices the pump and dump scheme is a popular trading scam to lure investors into buying a stock large amounts of a penny stock are purchased followed by a period when the stock is hyped up or pumped up once other investors rush to buy the stock the scammers sell their shares once the market realizes there was no fundamental reason for the stock to rise investors rush to sell and can take on heavy losses offer a place for small companies to gain access public funding in some cases penny stocks may provide a method to gain access to larger marketplace listing with a lower price penny stocks allow for significant upside in share appreciation penny stocks lack a liquid market with few buyers perhaps even after their price has increased there is limited information available on the company s financial record penny stocks have a high probability of fraud and bankruptcy of the underlying company tips for investing in penny stockswhile penny stocks are volatile there are some cautions that an investor can take to reduce their downside risk one is to conduct proper due diligence since penny stocks tend to trade in venues with lower entry requirements investors should take extra care to read the company s statements and ensure that the company is financially sound it is also important to rely on reputable stockbrokers while there are scams to watch out for most of them are promoted by dubious emails and cold calls a reputable broker should be able to provide high quality written research to back up any investment claims finally as with any speculative investment never put in more money than you can afford to lose while you may make a profit by day trading the returns are much more steady with established large cap equities can you make money on penny stocks despite the risks penny stocks can be profitable for a cautious or thorough investor the key is to avoid certain fallacies that are common among speculative investments such as the belief that they have the opportunity to make large gains while this is true they are equally likely to score large losses another important fallacy to avoid is the low price fallacy which holds that low priced securities are inherently cheaper than higher priced ones however this does not account for factors like market capitalization or liquidity even if a certain stock doubles in price it may be impossible to sell a large number of stocks without causing price slippage signs of scamsthough there is no fool proof strategy for knowing which penny stocks are fraudulent the sec recommends that investors heed the following warning signs in a company s record sec trading suspensions large assets but small revenues financial statements containing unusual items in the footnotes odd auditing issues and large insider ownership 1real world example of penny stock scamscalifornia resident zirk de maison created nearly half of a dozen shell companies and offered them as penny stocks to investors between 2008 and 2013 according to the federal bureau of investigation fbi de maison told investors that the companies engaged in a variety of businesses such as gold mining and diamond trading when in fact they did nothing he sold the stocks in boiler rooms offices where brokers use high pressure tactics to push people into buying stocks by promising large profits in 2015 de maison and seven other perpetrators were found guilty of securities fraud and sentenced to federal prison 2