Penny Shares To Buy

Many new traders and investors in the market are acting on news they see in the print media or hear on television, or, on tips from friends that they hear down at the local tavern.

There are many stories out there of people who have bought penny shares and “made a killing” having the inside running on companies that were about to produce a drug that cures cancer or discover an untouched oil field bigger than anything the world has ever seen.

The sad reality is that most of these stories are untrue, but it doesn’t stop people from pouring in money to speculative, low-priced stocks in the hope that they will get lucky.

The speculative, low-priced stocks that we speak of are known as ‘penny shares’, ‘penny stocks’, or ‘penny dreadfuls’.

Generally speaking, ‘penny share’ is the term given to shares that have a low market price.

Originally, a penny share was one that had a market value of less than ₤1 and, as such, every penny represented a significant percentage of the share’s value.

In the UK today, the term ‘penny shares’ generally refers to stock in companies with a small market cap, less than ₤100 million and/or a share price of less than ₤1.

In the US, a penny stock is defined as a stock that is a low price (i.e. it trades for less than five dollars) speculative security of a very small company. Often times these shares are thinly traded, can be easily manipulated, and can be difficult to find useful information on.

Penny shares are low in cost but, as the low price suggests, they are high risk. Many investors are lured into trading penny stocks due to the fact that they are ‘cheap’ and have the potential for rapid growth.

Whilst this potential for significant growth and rapid profits exists, so too exists the very real possibility that capital will be destroyed.

Empirical evidence has shown that many, if not most penny stocks lose their value in the long term. As such, the Securities Exchange Commission in the US has rated penny stocks as high-risk investments, with risks including limited liquidity and lack of financial reporting.

Sudden changes in demand and supply can have big impacts on the stock price, either up or down, whilst a lack of liquidity can make it very difficult to unload the stock, particularly if there are no buyers on the day.

So, why trade penny shares?

Like any investment, so long as you are prepared to take on the risks posed by trading penny shares, the results can be very rewarding.

That being said, however, it is wise that only people who already have some market experience trade or invest in penny shares.

Some brokers and advisers, ourselves included, also suggest that you do not invest too much of your share portfolio or working capital in these speculative shares.

If you cannot afford to lose your capital then you should not be thinking about dealing in penny shares.