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Some people consider penny stocks to be a poor investment. I, on the other hand, think that investing in a penny stock before that company becomes profitable is the best way to invest, because you can make a lot more money with penny stocks than would ever be possible with blue-chip stocks. I will now outline for you what you need to know about penny stocks and how to find the best one in which to invest.

Penny stocks are defined differently depending on who you talk to. Stockbrokers define them as any stock that trades below $5 per share. Regulatory agencies sometimes classify them as a stock with a price below $2. But, generally speaking, a penny stock is any low-priced security that trades on one of two exchanges; the Pink Sheets or the OTC Bulletin Board.

The Pink Sheets are an exchange where most startup companies first get listed. There are no listing requirements to be traded on this exchange. A company does not have to have any sales, nor does it have to reveal how many shares outstanding it has to qualify for the Pink Sheets.

The reason why a company tries to get listed on the Pink Sheets, even though their stock will not go up in price because they have no sales to speak of, is because it gives their company more substance and credibility; it is typically easier to attract additional capital, obtain financing, and execute contracts and agreements if a company is publicly traded, even if it is on the Pink Sheets.

Also, it is easier to get transferred from the Pink Sheets to one of the larger exchanges than it is to go from being a private company to hopping directly on to one of the major exchanges, such as the NASDAQ or NYSE. Companies listed on the Pink Sheets trade as ridiculously low as $0.00001 per share, all the way up to $500 per share and sometimes beyond. Foreign companies often have some of their shares sold in the United States by listing them on the Pink Sheets.

The OTC (Over-The-Counter) Bulletin Board is similar to the Pink Sheets. This exchange consists of relatively young companies either with no sales or a small amount of sales. Companies listed on it are sometimes fully reporting (meaning that they reveal how many shares they have outstanding and what their balance sheet looks like). Often, companies go from the Pink Sheets to the Bulletin Board once they are ready to become fully or semi-reporting.

Most publicly traded companies that are now listed on one of the major exchanges (NASADAQ, AMEX, NYSE), at one time or another, were penny stocks listed on the Pink Sheets or Bulletin Board. Rarely does a company go from being private directly to one of the 3 major exchanges. Google is a rare example of a company that was able to do that, because they were so successful so quickly. But, most companies have to pay their dues and edge their way up from the penny stock exchanges to the bigger ones.

So, investing in penny stocks can be an excellent investment because some of these young companies will one day be worth a fortune. The hard part is finding the right company to invest in, because for every successful startup company, there is also one that fails within the first year or two.