Whether you are a fledgling investor or a seasoned pro, we all at some point are tempted by the lure of the penny stock. Tales and advertisement of 3000% returns abound all over the internet, to try and lure you into investing in penny stocks. This article will look at the advantages and risks of small cap stocks and discuss one strategy on how to find the best penny stocks to buy.

Micro cap stocks by definition trade under five dollars. They are often smaller companies, or companies in financial distress although not always. Some very excellent companies are sold on the penny stock market. Part of picking the best penny stocks to buy is knowing how to tell the difference between the excellent and the terrible.

The benefit of these lower price stocks is they often have generous percentage moves in price in a small period of time. This can be both excellent and terrible. It’s fantastic if your on the winning end but obviously terrible if the stock is moving down.

In addition to high volatility, penny stocks have a couple of other significant risks.

1. They are not SEC synchronized and are consequently susceptible to unscrupulous brokers grossly manipulating information about the stock to sell more shares. You must be certain that the information you basing your choice on is not provided by someone with a stake in the outcome.

2.Micro cap stocks typically trade at lower volumes. This means that if you are trying to sell a generous block of stock you may not be able to sell at the price you want.

In small the risk of loss are greater with this type of investment. Of course that’s why your the makings reward is greater also.

If you are still interested in moving forward in spite of the risk, here are a few steps to help you pick the best penny stocks to buy.

1.Educate yourself: A lot money has been lost because investors jump into a touch without educating themselves first. Ignorance is a cruel and expensive teacher. Join forums, and blogs about investing in penny stocks. Learn all you can.

2.Use an Expert advisory Service: Investing is a business like any other and it is unreasonable to expect that you won’t have some overhead. There are businesses that do nothing other than research stocks all day. Some have fantastic track records and for a small fee are willing to share their research with you. learning as you follow the recomendations of an expert can dramatically speed up the learning curve.

3.Practice Practice Practice: Even though you might be buying the best information on the planet if you don’t do correctly you might still lose money. Open a brokerage account at a money off broker like Optionsxpress. Make a virtual account and paper trade with as close to a real account as possible. Spend a few weeks or months trading in a simulated account before you ever invest a dime of real money. You will be tempted to play real money early on, especially if you get some excellent picks right in the beginning but follow this advice. You won’t regret it. The emotion of having real skin in the game completely changes how you make decisions.

4.Discipline: More money is lost due to investors being unable to master their emotions, than for any other reason. Have a investing plot with rules you follow and stick to the rules.

5.Know your exits. Before you ever buy a stock you must know when you are going to get out.

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