Penny Stocks are stocks that are traded on the Over The Counter Bulletin Board (OTCBB) and on Pink Sheets. They do not trade on formal stock exchanges because they do not meet the requirements laid out by the Securities and Exchange Commission (SEC). These stocks normally have a value of less than $5 per share and their total market capitalization is less than $500 million.

For a starting investor, the next question would be how one can buy and sell penny stocks. Penny stocks are bought and sold over the counter by dealers through direct contact, telephone or Internet.

The main difference between dealers in formal stock exchanges and OTCBB and Pink Sheets is that the dealers in the OTCBB and the Pink Sheets do not match money for money. In other words, they already have an inventory of these stocks and as soon as an investor places a buy order, it is executed and the shares are transferred to the name of the buyer. They do not get any commission but they make money on the spread.

The buying and selling of shares take place at different times and at different rates. The rate at which a person is willing to buy a particular share is called the bid price and the rate at which the seller is willing to sell the share is called the ask price. This difference is called the spread and this is the commission of the dealer.

In some cases, a mark-up cost may be added to the cost of the penny stock. A dealer who has kept the shares of a particular company as part of his or her inventory may add a small percentage on top of the spread to be compensated for the market fluctuations. This small cost is called the mark-up price.

The primary step in penny stocks trading is to find a dealer. There are many penny stocks dealers listed on the Internet. The investor has to open a trading account with one of these dealers. In some cases, the dealer can act as the investor's agent. The dealer brings the investor and the trader together. Dealers are paid a small commission for this service. Due to the non-availability of information about these companies, investors may not be able to know the price information.

This is where the stocks dealer steps in. The dealer will have access to many traders and the dealer will call the trading desks of these traders and will get the best price information for the investor. Without these dealers, it may not be possible for investors to obtain this information because investors do not have access to these traders.
The dealers are present only to execute the investor's transactions. They usually do not provide any advisory services.

It is up to the investor to decide which stock he or she wants to buy. The investor has to do a thorough research on the background of each company to make the most money out of these penny stocks.