You've probably heard the term "penny stock" before.  Do you know what it means?  No, it’s not a stock you get out of a gumball machine at an investment office waiting room.  It’s also not a scam, either.  Penny stocks can be the difference between a diverse portfolio, and one that barely moves in either direction.

By definition, a penny stock is any stock trading under $1.00.  Stocks trading on the NASDAQ at $0.99 and lower for more than one month are at risk for being booted onto the "over the counter" market.  This is where most penny stocks are traded, and isn't necessarily a horrible place, but it’s not the best place, either.  Stocks here are often for companies who do not have to adhere to NASDAQ's strict regulations, so they can be sketchy at times.  There are a number of bankrupt and near-bankrupt companies here.  Not all corporations on the OTC exchange are bad, however.  Some are just new or troubled companies trying to honestly move up in the world of finance.

The biggest advantage of penny stocks is the power of numbers.  Unlike other stocks, you can buy a lot for a little.  Anyone who has ever played the market for a considerable amount of time can tell you that having a large number of shares is the quickest way to make a buck in stocks.  Most of the popular stocks on the NASDAQ are trading for $50 and up.  If you only have $500 to play with in your brokerage account, you are looking at around 99 shares of this stock after broker fees.  This may sound like a lot, but if the stock is only moving a penny to a nickel a day in both directions throughout the business week, you won't see much success for short term gains.  And if you are playing the market to short term gains and don't have a lot of startup capital, penny stocks may be your best option.  If you take that $500 and invest it in a stock trading at $0.01 per share, you can buy 49,000 shares after the usual 10 dollar brokerage fee.  You need to realize, however, that these stocks can be extremely volatile, especially if the "Volume" is high.  The volume of a stock shows the interest and buy/sell orders on a particular stock.  The higher the volume, the more volatile the stock price.  You can lose a fortune in penny stocks, or you can gain a fortune.  There is a lot of risk, but there can also be a lot of reward.