Investors interested in trading penny stocks must use caution when picking stocks and seek to invest in reputable stocks that are already profitable, recommends Market Watch. High-volume stocks are safer to trade than lower volume stocks, and investors should never trade above 10 percent of daily volume.
Penny stock investors commonly receive stock tips from investment newsletters, but investors are wise to do further research to find penny stocks that show high earnings after 52 weeks, which may be a safer investment, according to Market Watch. It is important to read disclaimers included with newsletter information, because the U.S. Securities and Exchange Commission requires them. A good penny stock strategy is to buy stocks trading at 1,000 shares per day and sell when stocks earn a profit of 20 to 30 percent.
Consumers should be wary of anyone claiming investors can get rich quickly trading penny stocks, warns Market Watch. Free penny stock newsletters touting stock picks are not very credible because companies pay to have their stocks promoted to potential investors. Likewise, investors should take penny stock investment success stories with a grain of salt. A rule of thumb from trading insiders is to never trust anyone making claims about a stock's earning potential, including company management, as penny stock fraud is rampant.