Penny stocks are understandably popular with many investors, simply because each stock buy cheaply, does at least have the potential to grow into a stock that sees your original investment value multiply many times over.

The obvious wealth-warning attached to this form of investing, is that not every penny stock is likely to hit the heights and make you money, indeed, some of them will bomb altogether and your money will be gone.

You can research penny stocks on a site like Money Morning and try to pick out some potential winners using the data available to you, and it would also help if you can find a way of doing this research easily and efficiently.

Here is a look at what are considered to be some top ways to research and pick out your penny stocks.

Be wary of scams and forums

Research is an integral part of any trading strategy and therefore you are most likely going to come across a range of different sources where you will witness promises of success or “advance information” before a stock is about to soar in value.

You need to be fully aware that there are numerous scam newsletters, online forums and blogs, where the intention is to tempt you into buying the stocks mentioned, which should have the effect of pushing the price up.

These free tips and potentially dubious sources of information come with a serious wealth warning and it should be remembered that in the majority of cases, it will prove to be virtually impossible to earn money as a result of these free tips.

There is no substitute for doing your own research and it invariably pays to always take the view that if someone you don’t know on a forum or via a newsletter, is passing on a tip concerning a penny stock that is expected to soar in value, this should be a trigger to be extremely wary rather than inspiring you to commit your cash to the stock in question.

Understanding what a penny stock is

It pays to be clear in your understanding of just exactly how the markets define what a penny stock is.

The general assumption is that a penny stock is a stock that is trading for under $1, but the SEC actually defines a penny stock as a stock that is trading for under $5. You will find these unlisted securities are traded via the over-the-counter market. The companies you find on the OTC are often going to be small companies who don’t currently meet the requirements that are stipulated in order to be accepted for a listing on the main stock exchanges.

The fact that the stock is trading in these murkier waters, where there is sometimes a lower level of transparency required, shouldn’t necessarily dissuade you from investing of course, you do at least need to understand that these stocks are subject to fewer regulations and lower levels of liquidity.

Accessing a common pool of knowledge

When you are researching a penny stock and want to ensure that financial and other relevant information relating to a company is from a reliable source, the SEC is one source that is worth considering using, in addition to other trusted resources that you are comfortable with.

Companies are required to publicly disclose information that is considered to be meaningful and relevant to investors, such as financial results or key appointments or company developments.

These announcements are generally going to be available on the SEC as part of the compliance procedures, which means that you can at least be sure that the research data you are accessing on there is likely to be unbiased and reliable.

Don’t forget to check out the company itself

If you have identified a penny stock that you are interested in, it would then make sense to check out the company itself before committing to buy stock.

It won’t take long to find their company website and to do a general search on the internet to see what news you can find on the company and get some more background on their latest news or plans, that might be the reason you are thinking of investing in them.

It may well surprise you to discover just how good a feel you get for a business by doing this basic research and even if you have already decided that the stock represents a good opportunity, at least you have given yourself a chance to clarify that your original interest was justified.

Picking penny stocks still requires the same level of discipline and diligence as any other form of investing, and doing your research should help you sort the winners from the losers.

Sarah Conway was a stay-at-home Mom with a newborn when she first gave penny stocks a try. She didn’t have anything to loose, but that first week really changed her life. She now writes about day trading and penny stocks encouraging others to give it a go.