Penny stock trading can provide those who are still beginning to invest in stocks with a variety of advantages. Previously, penny stocks are those that were priced at less than a dollar, which explains their name. However, the definition has been expanded to include stocks that are being sold at five dollars or less per share. Obviously, an important advantage of these types of stocks is that you can get some practice in stock trading with relatively low investments. Moreover, because of the low price, a slight change in price would constitute a significant rise in percentage gain.

Another important advantage of penny stock trading is that the investor has more options that will boost the probability that he will make some profit. For example, because of the relatively low price per share, he can buy more stocks. Or, he can purchase different kinds of stocks and apply the strategy of diversification. These kind of stocks are easy to purchase because stockbrokers can go directly to the company that is marketing the stocks and then sell them to the investor.

However, there are certain disadvantages in penny stock trading that investors need to consider. For one, the companies offering this kind of stocks are usually small cap corporations, which are considered to be riskier to invest in. There is also a greater chance that the investor might encounter a fraudulent company. Another potential pitfall is that transactions involving penny stocks are not often done via the exchanges. This may be riskier for the investor. Nevertheless, there are strategies that the investor can follow to minimize risk and one of these is to conduct some studies on the possible indicators of how a particular company will perform. What investors need is to continuously educate themselves and as they gain experience, they will gain the skill needed to pinpoint potential winners.