Penny stocks have hugepotential -- that's their blessing and their curse.

The potential rewards are enormous. In fact, a few pennies were the best performers in September. Energy XXI (Nasdaq: EXXI), Toreador Resources (Nasdaq: TRGL), and Candela (Nasdaq: CLZR) were all up well more than 100%.

Those quick jumps look like easy gains, considering that Baidu (Nasdaq: BIDU) and First Solar (Nasdaq: FSLR) would need to add more $400 and $150 to their share prices, respectively, to do the same.

Everybody loves pennies
It's the potential of quick gains in "cheap" stocks that keeps investors coming back. We typed "penny stocks" into Google , and the search engine spat out "about 1,710,000" hits. We did the same for more time-tested terms such as "blue-chip stocks" and "dividend stocks" -- the terms folks should be searching for in a bear market like this -- and got just 244,000 and 595,000 hits, respectively.

Sure, we expected a discrepancy, but the size of the gap was startling. It became even more interesting when we broke down those hits with Google Trends. According to Trends, penny stocks are particularly alluring to investors in Tampa, Miami, and Orlando -- the locales where the term is most often searched.

We hope the folks Googling "penny stocks" down there aren't retirees trying to cope with this crazy, crazy market.

This stock is set to take off! Or not.
According to the Securities and Exchange Commission, the term "penny stock" generally refers to low-priced (below $5), speculative securities of very small companies. To quote the SEC: " Investors in penny stocks should be prepared for the possibility that they may lose their whole investment." (It's worth noting that the emphasis in that last sentence is in the original.)

Pay attention to the SEC's entire definition, not just the stock price. Going solely on price would wrongly categorize billion-dollar companies such as Citigroup (NYSE: C) as penny stocks.

Regardless, the SEC is spot-on when it says that true penny stocks are among the surest ways to losemoney in the stock market.

Well, then, why do we love penny stocks?
We love penny stocks because they're fascinating. The world of pennies is inhabited by hardworking average Joes and Janes hoping to strike it rich, as well as by pumpers and dumpers, hypesters, and scammers. In pennies, the logic and reason that applies in the rest of daily life is replaced by zeal and prayer.

However, we don't love them enough to actually buy them. Yes, they have big potential, but their daily gyrations are unpredictable -- the stock-price movements have next to nothing to do with the underlying company the stock represents. In fact, trading in pennies is highly illiquid, and prices are often manipulated by forces not at all related to the business.

The dangers of incredible promises
If you're buying stocks without paying attention to the businesses you're buying, then you might as well be buying a lottery ticket. Or, to use another analogy, you might as well buy up every baseball card of a benchwarmer on the Akron Aeros Class AA baseball team and hope that he someday rises up, fulfills his potential, and becomes an all-star for the big-league Cleveland Indians.

There's a better way
Before you start saying the rest of the stock market is boring -- though you're probably not saying that any longer -- let us introduce you to some underfollowed small caps. They're nothing like penny stocks, yet they still offer some of the best returns on the market. Unlike penny stocks, promising small caps: Continued...