Penny stocks have been around since the 19th century, and they\’ve also been a big part of the American investment system ever since they developed. This era is actually the one that gave these stocks their names, as modern penny stocks cost far more than a penny. They average between ten cents and five dollars apiece in modern money. Why don\’t we take a look at some of the risks you\’ll encounter when dealing in penny stocks, then ways they can help you turn a profit.nnPenny stocks are share offerings to investors made by companies either too new or too small to be listed in major stock exchange listings. There\’s a big potential for growth for relatively small investments initially, but pump and dump schemes are a real risk in this area. Just like anything else that has to do with the OTC (over-the-counter) market, buyers should remember to beware.nnBuying penny stocks reasonably means that you need to get the company\’s business model independently appraised. Just like when you buy shares of any other company that\’s being publicly traded, you must understand the company business model, what the company does or makes, who their competition is, and what they have to offer.nnOne of the things that makes penny stocks so appealing is the fact that most of the businesses offering them are extremely simple. One typical kind of penny stock is a mining company that profits only when the price of the material it extracts goes above a certain level. There are also some oil exploration stocks that are valued in the same way.nnPenny stocks are considered a high risk vehicle, according to the Securities and Exchange Commission. The risks you may encounter with these stocks include indirect and incomplete reporting of financial information, limited liquidity and even fraud. People using a day trading strategy can find that penny stocks that are in sudden demand create enormous volatility movements. Because of this, it\’s hard to short sell penny stocks.nnThe reporting guidelines on penny stocks are a lot less strict than they are for stocks listed on the national exchanges. In fact, some stocks will just delist for a few days. In the investment type known as the Pink Sheets, there\’s almost no regulatory requirement on penny stocks, no minimum accounting standards or reporting guidelines.nnBecause these stocks aren\’t standardized and don\’t have an generally accepted requirements for accounting, they can be extremely vulnerable to being manipulated or even just plain fraud. People posing as independent observers can encourage people to run up the price, then they sell and de list the stock. This is the classic pump and dump scam.nnOf course, that doesn\’t mean you should never invest in penny stocks. There are lots of real, legitimate startup companies out there, and they need to have a good place to get up and running. If you\’re able to pick a winner, you\’ll get an impressive return.nnIf you have the ability to spot companies that have promise, your payout will be huge. Even if you lose on most of your stock picks, the single winner will be such a big gain that you\’ll forget about the ones that didn\’t work.