Having built a career, not to mention a massive following, around the investment vehicle known lovingly as "penny stock," it may seem strange for me to warn you to fear these speculative investments. Yet, warn you I will, because I've seen three major reasons why these sub-$5 shares might be too risky for you.

People getting involved with penny stock investments are buying the wrong companies, for the wrong reasons, and then using the wrong trading tactics with the shares. All of these mistakes can end up washing out hopeful investors, and leaving them broke and resigned to an ever-burning disgust of any company that trades in the lower price-per-share ranges.

The Wrong Penny Stock Companies:

Often, people invest in a "hot" penny stock because they heard about it through a friend, or it has a good story behind it. Rarely do these hyped-up investments have strong fundamentals or growth of revenues and market share.

Too often people get involved with these shells of companies simply because they think that the business objective is a good idea, or will result in massive revenues if they are successful.

A better idea is to wait until that hot investment proves itself first, by booking revenues or landing big contracts. Usually, they don't, Most times, investors in these companies lose. Of course, if you think that all it takes to make money in the game is to find a great story, then you will deserve what you get.

Trading Penny Stock For The Wrong Reasons:

The majority of penny stock investors are impatient or desperate, and are simply looking for a way to get rich quickly. While this can and has happened, it usually does not.

The best way to get involved in any type of investing is to find high-quality, well run companies that have rock solid fundamentals and proven management teams. Look for those investments that pass Leeds Analysis (the standard research method for low-priced shares).

Finding companies like this is significantly time-consuming, but if you become good at it, there is no more lucrative way to invest.

The Wrong Tactics for Penny Stock:

Once people decide on a penny stock that they want to buy (or choose when they want to sell one), they often use poor trading tactics.

For example, most traders buy or sell all their shares at one time, rather than staggering the trades. Selling part of your holdings over time and in three or four trades is often better than just dumping the whole lot at once. This is true of bigger stocks, and even more so with smaller ones, as their thin trading volume leaves investors subject to significant price volatility if they scoop up or dump a big block of shares all at once.

Other penny stock investors buy and sell with market orders, rather than limit orders. This is a major mistake when trading low-priced or thinly traded shares, but one that is easily avoided. With a market order, you get whatever price the person on the other side of the trade has dictated. With a limit order, you decide on the price you are willing to pay (or at which you would sell, if you're on the selling side). You can learn more about buy and sell order types from your broker, or online.

By paying attention to, and therefore hopefully avoiding, the three reasons to fear penny stock, you might then dramatically improve your odds of trading success with these low-priced investments.

If you get involved with the right penny stock companies, and you trade those shares for the right reasons, and with the right tactics, you will be among an elite group. Specifically, you will be one of the few who make dramatic profits from good, high-quality low-priced investments that can make you very wealthy, while avoiding the downfalls that give the sub-$5 investment vehicle a bad name.