Penny stock investment is supposed to be risky - and therefore a possible way to earn handsome returns. It all depends on how well someone chooses his penny stock portfolio. If you can spot potential of undervalued stocks, they might turn out to be a possible goldmine for you. On the other hand, you may also end up losing your shirt if you somehow misread the fine print of any upward market movement in penny stocks. In this context, investors will be well-advised to do a through research on the target penny stocks before putting in their money.

Potential investors of penny stocks can easily smell fraud if they have some sense of stock market functioning. Suppose, an investor wants to buy a particular, then he should check it out to find the recent history of market movement in that particular stock. Whether that stock was dormant earlier and then started rising too sharply all of a sudden without any significant change in the fundamentals of the related company.

Knowing the latest developments in the company's business plan and financial performance can provide insight as to whether the sudden movement is spontaneous or a result of rigging by some vested interests. Sometimes scammers buy a penny stock in large numbers and then spread positive murmurs about the related company in order to jack up the price. Then they cash in on the euphoric investor mood in a surging capital market. And when the target stock later reaches abnormal heights, they just exit, leaving the late investors to hold the can.

When this happens, the risk is that a gullible investor will lose heavily. Another risk is that after burning his fingers so badly in a penny stock, the investor may behave later like someone once bitten, twice shy in regard to stock markets.