As investors saw most recently with the sub-prime lending market, liquidity problems can be a huge deal for investors. And unlike lending, low liquidity plagues the penny stocks on a daily basis. Because penny stock investing is such a niche area, even relatively low trade volumes can have an impressive effect on a stock's share price. According to the Securities and Exchange Commission (SEC), "Penny stocks may trade infrequently, which means that it may be difficult to sell penny stock shares once you own them. Because it may be difficult to find quotations for certain penny stocks, they may be impossible to accurately price."

What this means is that if you play with penny stocks you may end up with a whole lot of worthless stock that you can't get rid of.

Another concern for investors is the lack of stringent reporting standards for companies whose stocks trade on OTCBB or in the Pink Sheets. OTCBB does require that registered companies stay current with SEC filings, but those filings are the bare minimum -- well below what an exchange-traded company would have to file.

Since companies that are delinquent in submitting their filings to the SEC are still so accessible to individual investors, penny stocks have proven to be a treasure trove for dishonest people.

That's one of the reasons that the SEC has taken such an active role in making sure that the American public is protected from unscrupulous companies and individuals in the penny stock arena. For your broker to even sell you a penny stock, they're legally required to send you a document outlining the risks of penny stock ownership. There's a reason brokers and regulatory bodies go to such lengths to make sure that you're not blindly investing in penny stocks; scammers are out there.

Next: What's With the Penny Stock Spam?