Like with any stock, a penny stock's financials are an essential tool for investors. But with penny stocks, the question is more about the quality of the financial statements. Does the company file on time? Who was the auditing firm? Do the company's financials look healthy? If you can answer yes to those three questions, it's time to stroll through the footnotes.

In most companies, footnotes are an oft-overlooked, yet very important part of its filings. And while you might be able to get by without reading GE's (GE - Cramer's Take - Stockpickr) footnotes, miss the footnotes for a penny stock, and your portfolio might miss its mark. Since penny stocks are smaller companies that are more prone to things like related-party transactions and non-GAAP accounting oddities, don't walk around the footnotes for a penny stock.

Conclusion

Fact: Penny stocks are inherently risky. Fact: Penny stocks can be fodder for scammers. Fact: Penny stocks can make you a lot of money.

Even with all the risks and drawbacks involved in penny stocks, many investors simply find that the potential windfalls are well worth it. There's a reason that penny stocks remain popular among a brave clique of investors: Penny stocks can deliver a very impressive return. Hopefully, you'll find that your new penny stock know-how makes the Wild West of investing a little more tamable.


P.S. Jim Cramer says, "The under-ten sector is a minefield. But the Stocks Under $10 folks know where to find the proverbial pot of gold." For more information about TheStreet.com Stocks Under $10, click here.

And in the clutter of small and mid-cap stocks, how do you separate the breakouts from the fake-outs? Turn to TheStreet.com Breakout Stocks.