You can make a killing investing in penny stocks. At least that's the story that many of the ads on the internet, or the advisory services would like you to think. And the fact is that there are many advantages to investing in penny stocks that are only available to the individual investor, as the institutional investor can't really operate in the penny stock arena. Let's examine some of the benefits.

Quickly, just what is a penny stock? Technically, it's any stock whose share price is under *$5. However, the generally accepted version is that it also is a company that is not listed on a major stock exchange like the NYSE or the NASDAQ. Because of that they are not required to make the SEC financial disclosures that companies listed on the major exchanges have to make.

Advantage of Investing in Penny Stocks

First, it's attractive to many investors because you can buy round lots (lots of 100 shares) for a relatively small investment. Holding thousands of shares is much more exciting for most people than simply holding a few shares of Cisco or Google.

Because of the low share price, a small change in the stock price translates into a more significant percentage gain or loss. It's been well documented over the years that low price stocks tend to be more volatile than higher priced stocks. This give the allure of making a lot more money in a short period of time.

All of these stocks are small caps, or some might refer to them as being micro caps as well. This just means that their total value would rank towards the bottom of all publicly traded companies. This is actually good, because its been verified in many studies that a stock selection scheme that simply buys the lowest cap companies in the US, and then holds them until they move to a higher group will outperform the market with no other real information or stock picking needed. So buying small caps is a traditional value investing approach that has worked for decades.

With these advantages, it seems that everyone should be adding penny stocks to their portfolios. But there are some significant disadvantages to investing in penny stocks that you should understand before you invest your hard earned money...