Investing in penny stocks provides traders with the opportunity to significantly boost their profits; however, it also provides an equal opportunity to lose your trading capital quickly. These 5 strategies will help you lower the risk of one of the riskiest investment instruments.

1. Penny Stocks are a penny for a reason.

Even though we all dream about investing into the next Microsoft or the next Home Depot, the truth is, the odds of you finding that once in a decade success story are slim.

2. Trading Volumes

Search for a consistent high volume of shares being traded. Looking at the average volume could be misleading. If ABC trades 1 million shares now, and does not trade for the rest of the week, the daily average will appear to be 200000 shares.

In order to get in and out at an acceptable rate of return, you need consistent volume. Liquidity should really be the first thing to look at.

3. Does the company know how to make a profit?

Even though it is not unusual to see a start-up company run at a loss, it's important to look at why they're losing money. Is it manageable? Does it simply require corporate restructuring strategies? Do you fully understand what benefits will come from restructuring a company?

Will they have to seek further financing (contributing to dilution of your shares) or will they have to seek a joint partnership that favors the other company?

If your company knows the best way to make a return using a restructuring company, the company can use that money to grow their business, which increases shareholder value.

You have to do a bit of research to find these companies, but whenever you do, you decrease the risk of a loss of your capital, and increase the odds of a much higher return.

4. Have an entry and exit plan - and don't give up.

Penny stocks are volatile. They will quickly move up, and move down just as quickly. Keep your stops close. In case you get stopped out, proceed to the next opportunity. The market is telling you something, and whether you want to admit it or not, it's commonly best to listen.

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