Investors add penny stocks to their portfolio for usually two reasons. First, they are cheap at less than $5. Second, they can give big returns in a short span of time.

With penny stocks, there are quite a few things that could go wrong. It is very important to avoid these mistakes so that it is you can make bigger profits instead of getting wiped out by the market.

Doing Little Or No Research

The first and biggest mistake you can do with penny stock investments is not doing as much in-depth research as you possibly could with your available resources. It cannot be overemphasized that penny stocks are one of the riskiest investment due to many reasons. The most important one is that some sources of company information may not be reliable. Always do your due diligence (fancy phrase for 'solid research') about the company, about the industry and about the trends so as to avoid falling victim to bad penny stock trade.

Relying on Insider Information

The Internet is a double-edged sword. In one case, some internet websites give accurate and reliable information about these stocks. There will always be 'secret' sites offering 'insider information' about a few stocks. Well, this is one of the gravest mistakes you will ever make - relying on insider information. Instead, you should always double check the data and information coming to your lap. This way, you can make better investment decisions.

Taking It Easy

Many naive investors think that penny stocks investing is an easy way to rake in the cash. This could not be further from the truth. In fact, many an investor has lost money on penny stocks by taking it easy, just plunking in the money without rhyme and reason and then waiting for the profits to fall into his lap.

Just like you have to big-cap stocks, you need to do the hard work for these small-cap stocks also. Do your research, watch your investments closely, formulate an entry and exit plan and follow the trends.

Investing Everything

To paraphrase an old adage, you should never place all your money in just one type of investment, especially not with penny stocks because of the high risks involved. The penny stock market is so volatile that you can lose all your savings in a day of trading.

You don't have to suffer the same bad fate. Make sure that penny stocks are a part of your investment plan and not the 'whole' plan. Investment allocation experts say limit your penny stock investments to 20% of your entire portfolio. We think this should be more like 10%. Losing 10% is better than losing 100%.