• Trading in penny stocks can be both risky and profitable.stock market analysis screenshot image by .shock from Fotolia.com
  
  Historically, penny stocks referred to stocks that were priced less than $1, but as the stock market evolved, so did the term. "Penny stock" is now applicable to all stocks that trade under $5, and are generally thought to be high-risk investments. Penny stocks are usually issued by small, growing companies with limited funds and resources. Penny stock prices are much more volatile than stocks of larger corporations, and usually enjoy little attention from professional investors.
  
  

Research

• Penny stocks are not a bad investment strategy if you do your research. It is imperative to recognize the fact that penny stocks represent companies that have just been established, and are not likely to attract loans and investments. Even with these limitations, penny stocks can be a profitable investment venture if the particular penny stock, or class of stocks, is studied before investing in it. Subscribe to a dependable newsletter to keep track of the penny stock market, and read up on potential investment opportunities in promising penny stocks.
  
  

Trade Volume

• Companies that have high volumes of their shares traded routinely are generally thought to be safer than other penny stocks, because an investor can liquidate the stocks at any time, given the large number of active buyers and sellers. Watch penny stocks with large trade volumes and select the companies that are actively traded and have a substantial number of participants.
  
  

Performance

• Evaluate the financial and operational performance of the company. Profitability is generally a good indicator of future prospects, and the measure of success (or lack of it) depends on how individual companies are managed. Growing companies are apt to lose money initially---evaluate the reasons why the company loses money by determining whether the losses are recoverable, or whether they are sufficient enough to make the company fail. If the company sustains losses frequently, it will eventually have to obtain more financing, which will negatively affect the price of the penny stocks.
  
  

Risk Tolerance and Investment Horizon

• Invest according to your risk tolerance and investment horizon. Risk tolerance is an important factor for anyone interested in actively trading in penny stocks, because an individual with a lower risk threshold will behave differently than one with a higher tolerance to risk, especially given the volatility of penny stocks. Penny stock prices fluctuate over a broader range in a smaller period, compared with conventional stocks, and if you have a high tolerance for risk, the risk of losses will be offset by the prospect of higher returns. Investment horizon, referring to the amount of time you are willing to hold on to a particular penny stock, is related to risk because low-risk investments tend to see profits only when held for a longer period of time.
  
  

Investment Strategy

• You should have a clear plan of action and defined objectives when investing in penny stocks. Determine how much loss you are willing to sustain, and how much profit you are seeking. Always trade according to the plan---sell if the penny stock prices dip lower than you are willing to lose or if the prices go above your expected returns. Never invest more than you are willing to lose, and never invest more than 20 percent of your total portfolio amount.