Before you invest in the penny stocks of a microcap company, you need to get information about the company and its financial status first. Failure to do so could mean the loss of your investment, and maybe even your retirement savings.

Here are some things that you should look out for when researching about a microcap company and its penny stocks.

Warning signs about the company

Suspensions from the sec If a company reports inaccurate or unreliable information with the SEC, it can be suspended from trading for up to ten days. Reconsider your decision to invest if the company has been given a trading suspension.

High pressure sales tactics If a company or a broker is pressuring you to buy penny stocks by telling you about what they describe as a once-in-a-lifetime opportunity based on inside information, be suspicious. The hard sell to buy these stocks even before you have had a chance to investigate should tell you that there is a hidden motive somewhere.

Large assets but small revenues sometimes, microcap companies assign high values to supposed assets, which actually have nothing to do with the business at all. If a company has low revenues but large assets, find out if there's a valid explanation for the low revenues.

Odd items in the financial statements The footnotes of the company's financial statements may indicate unusual transactions such as unusual loans or exchange of questionable assets for company stock. This may be part of a penny stocks fraud, so if odd items appear in the footnotes, be wary.

Auditing issues If a company's auditors refused to certify the company's financial documents or stated that the company may not have enough money to operate, the penny stocks sales may involve fraud. Another suspicious auditing issue is when the company changes accountants often.

Shares of stock owned by company insiders Pump and dump schemes are likely to happen if the company's officers and promoters own large amounts of stock. When the company's officers and promoter control most of the penny stocks, they can easily manipulate the price, and this is not good. Ask your broker for more information but if this is a scam, you won't be getting a truthful answer.

Warning signs about the promoter or market maker

Be extra careful in dealing with brokers and cold calls. Make sure the broker/dealer is someone you can trust. Cold calls from strangers whom you don't know from Adam should ring a warning bell in your head too.

* If you are dealing with a broker and he refuses to provide you with written information about the company whose penny stocks he is promoting, back off; this is likely to be a fraud.
* Don't give out your social security number, or your bank account and securities account information, especially to a cold caller.
* If anybody, especially someone whom you don't know very well, recommends or tries to cajole you into buying foreign investments, don't fall for it.