The idea of investing in penny stocks can be quite attractive. Investing just a small amount of money, can buy you a lot of shares. As the price of the stock rises, your small investment can turn into a small fortune. A penny stock is generally defined as a stock that trades for less than $5 per share with a market-cap of $300 million or less. Here are some strategies and tips to employ to help your make your penny stock investments profitable.

Research the penny stock companies that you want to invest in. Just because penny stock companies are small does not mean that they do not have a plan to take some serious market share down the road. You should be able to speak in specifics about the product or service that your penny stock company provides. If you do not understand what they sell, then there is a good chance that buyers of their products or services will not understand their business either. For instance, if you want to invest in a small pharmaceutical company that is developing products to fight diseases, you should know what those products are, where they are with the FDA trials, and how they plan to sell the products once they are approved so that the company can make money.

Read the quarterly reports for the penny stock company you want to invest in. Many penny stocks trade on something called the OTC, or pink sheets. These are exchanges that offer little regulation and require very few financial filings. Avoid these companies and seek companies that trade on the New York Stock Exchange or Nasdaq, which do require transparent financial records. Read up about their cash, debt, orders and growth from quarter to quarter and look for a pattern where they are eliminating debt or earning more money.

Purchase shares of penny stock over time. Penny stocks tend to be volatile because they do not trade a lot of shares when compared to larger market-cap companies. This can causes quick dips and spikes in price. To avoid this, purchase your penny stock with at least three different orders that span several months. This will help you avoid dips and spikes while at the same time allow you to gain a “dollar cost average” price that is historically reflective of that period of time.

Use “take profit” and “stop loss” orders. It is virtually impossible to watch the penny stocks trade all day long and keep on top of every trade crossing the wire. Therefore you want to place orders ahead of time, which will lock in profits and avoid large losses. A “take profit” order is an order that is placed above the current stock price. When the stock hits that price, the order turns into a market order and is then sold to lock in the profit. A “stop limit” order is an order that is set below the current stock price. If the stock crosses that limit, it is then sold to avoid any further decline.

Diversify your risk for your penny stock portfolio. Create a portfolio of five to ten stocks that span different sectors of the market. Sectors are things such as healthcare, technology, retail and gaming. By purchasing shares of stock over so many various sectors, you will limit losses if any one stock or sector gets hit by the market.

Form an exit strategy for your penny stocks. In order to make income from your penny stocks, you must have a plan on when you will sell them. Again, this will be different based on your investing styles. Some day traders may just want a quick 30 cent rise in price, while other investors want to hold a stock for the long term. Whatever the case, you make money on a stock when you sell it for a price higher than what you bought it for, so determine that threshold for your investment style.