What about Penny Stocks?
Q. What about Penny Stocks?
I'm interested in trading the few very low priced shares in the order of under 0.20. If a share is trading at say 0.06, what is the next step up or down? Is that different if a share is trading at 0.20? Where can I find a list of shares trading below 0.20?
A: You could choose to do it manually which would mean you pick up a copy of the Financial Times and scour the share prices. The alternative would be subscribing to something like the Penny Share Guide. There is also a magazine called Warrant Alert that you could subscribe to in order to obtain the information about Warrants (prices, premiums, expiry dates...etc).
As for your question about the next step up or down from 6p (I am assuming that you are referring to UK traded shares), they can go to 5.75p, 5.5p, 4p or even 0.1p on the downside or 500p (dreams are made of these ones).
It is a fact that penny shares can potentially deliver super-normal returns - doubling, tripling and in a few cases some may even turn into ten-baggers... Having said that, penny share trading is dangerous territory. Many investors will usually start with a limited amount of capital so they may very well look favourably at so called 'penny shares', as this will allow them to buy many shares, problem is that they'll cheap for good reason. Usually there is very limited interest in these stocks as they do not have the earnings to support the price. Some, in fact have negative earnings or base their valuation based on future projections. Also, it is all well and good that the last trade for your stock suggests a paper profit but there's unlikely to be any sizable liquidity in the market. This means that you will be waiting forever and a day to get rid of your 50,000 x 1p shares. You're much better off betting on companies with robust business models and reasonable expectations of earnings growth in the small cap space - personally I wouldn't touch anything with median historical daily trade value of less than £20,000 per day.
Some of the most salient points when trading penny shares (especially if they are less than 1 pence!) are:
- Penny shares may possibly only be listed on the AIM market (this may not be a problem for some, but I prefer some regulation...etc).
- As opposed to looking for large caps and seeking out the companies that pay dividends here you are mainly looking for capital appreciation which means that stock picking becomes more important. Successfully speculating in small caps is all about seeking tomorrow's stars before the rest of the market catches on...
- Don't gamble with penny dreadfuls but do try to pick shares that have the potential to make a lot of money or that sell a niche niche product or service. Here, one has to be prepared to sit things out, the shares might mark time for about 3 months and all of sudden...pop.
- Also, penny shares may not have enough liquidity, you can certainly BUY shares. But, when it comes to selling, are there enough mugs to sell to? Liquidity would be a key issue. Also, thinly trades shares are open to manipulation (pump and dump)...etc
- Small caps and penny stocks are likely to be market maker only which in practice means there are fewer market participants and if liquidity is scarce, it becomes more difficult and expensive to trade especially if you wish to trade in bigger sizes since you would have to pay more for a complete fill.
- Penny shares also have a relatively wide bid-ask price; this is the price you pay for getting in early. Example 1) a share at 200p may trade at 200-205 - (a £200 investment would have to increase by 2.5% to break even, excluding broker costs). example 2) a share at 20p may trade at 20-23 - (a £200 investment would have to increase by 15% to break even, excluding broker costs).
- In Australia the lowest a share can go is 1/10th of a cent = $ 0.001 price steps are 1/10th of a cent, so the next price up got to be $ 0.002. In the US the lowest a stock can go is 1/100 of a cent = $ 0.0001 price steps are 1/100 of a cent, so the next price up got to be $ 0.0002.
- Another thing to consider when 'investing' in such companies is that a £500 investment is the same regardless of the share price; in other words, a 25% loss is a 25% loss.
- As a general rule keep in mind that dealing in small caps and penny shares is riskier than trading/investing into tried and established companies. One of the main things to keep in mind when dealing in small companies is to get the hell out fast if anything negative suddenly comes out.
- Penny shares are in most cases not for long-term investors looking for good dividend yields. Likewise, these companies have nothing whatsoever to commend them and no amount of research is likely to yield positive results. Hypothetically, if an individual has a monthly target of £2,500 trading profits and achieves say £3,000; he/she can easily divert the excess of £500 to speculation of this nature without any REAL downside. To increase one's potential prospects, this can be divided into 2 or 3 positions.
- Never put more than 10% your total portfolio in small caps but spread it across larger companies. Large caps outperform small caps in some years, and the opposite is true in other years. But when dealing in penny stocks there is a lot of luck involved...
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