Penny oil stocks are low-cost stocks in oil and gas companies. The Securities and Exchange Commission (SEC) defines penny stocks as stocks selling for less than five dollars a share. Because companies selling more expensive shares sold on major exchanges are required to file far more financial disclosure than companies selling penny stocks, penny stocks tend to much more volatile. Buyer beware is definitely a key philosophy to employ when delving into the penny stock market.

So why would anyone consider investing in these potentially risky instruments? Following are three reasons to consider oil penny stocks as part of your investment portfolio.

Cost

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One of the primary reasons investors buy penny oil stocks is because they are cheap. It doesn’t take a tremendous amount of capital to get into the penny oil stock market and, in spite of the risks associated with the penny stock markets, there are still plenty of solid companies that sell their shares at a low cost. These could be start-ups, companies heading for bankruptcy and restructuring, or businesses carrying an excessive amount of debt. The importance of research in penny stocks cannot be stressed enough. That said, penny oil stocks can be a great way to diversify your portfolio.

Emerging Oil Technology

The boom in oil drilling in the United States and elsewhere has been driven by technological advances. This technology has allowed companies with less capital to get into the oil business and compete with the big guys. Because these smaller operations don’t need as much capital to run their companies, they may be selling their shares as penny stocks.

If you’re looking for a start-up oil and gas company to invest in be sure to do your research. Find every publicly disclosed financial statement you can and look out for red flags like excessive debt. Read interviews with the company executives about operating strategies and goals. An above-board company will tend to be willing to share information, while scammers and frauds will tend to report as little as possible.

Fast Turnaround

When investors buy penny stocks they aren’t generally looking for long-term instruments. Instead, the idea is to get in as a stock price is rising and get out before it goes down. Sometimes, penny stock traders will not hold a position for even 24 hours. The inherent volatility in the oil market can also be a source of profit to the trader who takes the time to do their homework and study the movements and trends of penny oil stocks.

By understanding how an event affects an oil stock price, a savvy trader will watch for these events and understand how to act on them. For example, a political crisis or natural disaster in certain parts of the world will tend to drive oil prices up. Oil penny stock traders buy in when these events occur and get out after the turmoil has subsided and the oil prices normalize.

There are a variety of on-line resources that can help you effectively trade in oil penny stocks. The price of crude oil can be tracked in real time, and screening software can be used to help avoid fraudulent actors.