Penny stock pros and cons are part of the landscape of the penny stock world. These stocks offer the potential for high gains but also expose the investor to high risks as well. These markets are often subject to large fluctuations. There are a few concepts that the potential penny stock investor should keep in mind.

1. Do your own due diligence.

As a trader in penny stocks, you must due your own research or diligence. Sometimes these young companies do not have full financial reports available, competent management teams in place, or even a definitive product to sell.

2. Contact the company

The best way to determine the status or legitimacy of the company is simply call or email them for more information. Most companies list their main contact numbers or email address. Also you should consider doing a directory search of the company independently of the given numbers to see if the listing is a real world business listing. If it is not listed anywhere other than the company website or brochure, look for another company to invest in.

3. Look hard at the financial past.

A study of the newest and long term history of the stock will be helpful in avoiding a disaster. You are looking for a company without a lot of reverse splits and reverse mergers. These are the warning signs of a precarious future for the company.

4. Don't dismiss the stock without good reason

Not every company that trades for pennies should be dismissed. Many are simply small companies trying to grow their business enough to end up trading on the larger stock market exchanges. A great number of these smaller companies lack enough financial history for you to make an informed decision.

Penny stock companies may be brand new companies trying to raise capital to expand and grow or they may be older companies that are teetering on the edge of bankruptcy.

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