Penny shares is the more common term for what people in the US call penny stocks.
The term “penny share” doesn’t have a set definition. Different people pin different meanings on the term. But very simply, a penny share is a share which presents some degree of risk due to the low value it holds. Some brokers put a ceiling on the value of a penny share – commonly no higher than £3. Others stipulate a ceiling on the Market Capitalisation of the company itself. This does not necessarily mean the value of the company is low, however. A company with 10 million shares priced at 1p bears the same value as a company with 1 million shares priced at 10p.
Some financial commentators describe them as fool’s gold. While there are risks, this criticism is misleading. Fool’s gold is exactly that. It glistens like gold, but there the similarity ends. Penny shares, on the other hand, have massive potential. There is no question that this potential is fraught with risk. Shares in a new company could end up being worth precisely what their name suggests. But with a little industry know-how, they can be an exciting and lucrative investment. What’s more – and this is the exciting part – the actual potential for the net worth of a penny share is limitless.
Throughout this website we’re going to be covering a whole range of topics such as: penny shares to watch, up and coming companies, newly listed companies, what to look for in a company, day trading v investing, investing terminology and many more.
Here are some of the many kinds of penny shares:
Start-up Shares
Remember, many of the biggest, most powerful companies in the world at one point began as simple penny stocks! Some examples include Blockbuster, Sun Microsystems and the Ford Motor Company.
Recovery Shares
Even failing companies can find their feet again. New management or corporate restructuring can turn companies around. But as their share prices slump into a trough, there could be money to be made as those shares begin peaking again.
Cyclical Shares
In this time of economic uncertainty, the cyclical share is likely to become increasingly common. As its name suggests, these are shares which fall and rise in value according to fluctuations in the economy. Even just a little knowledge of which industries are likely to suffer these fluctuations can give a potential investor some useful inroads towards a healthy return.
Defensive Shares
Effectively the sister of cyclical shares, these are stocks which prosper when many other stocks are suffering. They are commonly industries which maintain steady consumer demand even during times of economic crisis.
The Alternative Investment Market (AIM)
One of the preferred places in which to trade penny shares is the Alternative Investment Market (AIM), which was founded in 1995. You could think of it as the London Stock Exchange Lite, since it is a less regulated than its bigger brother, and many of the companies trading on it are quite small.
Why Trade this high risk stock?
As we’ve said already, trading in these shares can be enormously exciting. But it’s a thin market – that is, there are few bids to buy and few offers to sell. That means that there are substantially fewer trades taking place, so when something happens in the market, stocks can rise and fall very sharply. Part of the excitement of investing in such stock lies in how those sharp changes can be far greater than one might expect on the Stock Exchange, and prices can shoot up just as quickly as they shoot back down.
This volatility is one of the main reasons for doing your homework before entering in to the world of penny shares. A quick search on Google will present countless websites offering insights. These might be a good starting point. If you put in the time and the effort, you’ll be able to find the companies that interest you, assess why the share prices are rising or falling, and when best to buy or sell. You’ll be able to learn about trading volumes. You’ll track down financial reports and see if your target companies are growing consistently. Indeed, if you can gather together some good, reliable tips, you could conceivably make a profit. You probably won’t be buying yourself a Annaliesse yacht on the strength of your share trading, but you should see a reasonable return on your investment.
But, really – who wants to see just a reasonable return? Making a reasonable return is almost as unattractive as the risk of making no return at all! The real thrill of penny stocks isn’t to be had wiping your brow after narrowly breaking even. The thrill comes from taming the market and making serious profit. As the old saying goes, give a man a fish, and you’ll feed him for a day: but teach that man to fish, and you’ve fed him for a lifetime. Of course, one could also just as easily say that a fool and his money are soon parted. But a man who can find the best shares for himself is no longer a fool…
Penny shares, then, is the place to be if you really want to learn how to fish.
What to look for in a Penny Stock company?
With high levels of risks and failures in penny stock trading, there are even those that have made quite stable streams of income by trading in this field and staying alert. So, how can you become a good investor when it comes to penny stock trading? Read the most important tips listed below to get you safe from determine the right company that issues penny stocks:
1. Guaranteed past performance – A good rule of thumb while investing in any company for the first time is to have a great analytical and judgmental look at its financial statements and past records. However, we are living in a world filled with realistic events and happenings, so if you are an ideal person looking for an ideal opportunity to earn ideal investments in ideal time, then forget it. Past performance is a good indication of company’s success but never the guarantee of future success too. Who knew that Enron or Lehman brothers or other big giants would go bankrupt during the recent recession of 2008? The future, in the world of finance is always uncertain. As a result, investing in those penny stocks showing past successful performance is often a good gauge, however not something to be relied upon.
2. Recommendation on TV, magazine or internet – There are so many misleading sales tactics used by penny stocks trading firms that there is no way for the layman investor to know what’s good and what isn’t. Be certain that these recommendations that you see as ads in TV, internet and magazine are usually paid and not as a result of natural recommendation from genuine people. Look out for those firms that keep on recommending others to invest in themselves as these companies are usually scams.
3. Insurance covered by Securities Investor Protection Corporation (SIPC) – Many firms would trick you that their insurance coverage by the SIPC is a proof of their legitimate business practices. Unfortunately, that is a big myth and one misconception often dominated by these firms on their potentially new investors. SIPC does not provide insurance against the fraud or changes in value of investment over time, but only covers those securities held by customers in case the organization gets bankrupt.
4. Federal Licensing – Just because a firm is licensed with the federal authorities, does not make it legitimate enough to conduct business operations. Many companies can still opt for the safest method after draining away millions of dollars of their investors and exiting the market without creating any noise.
5. Do your own research – You are blessed with internet. Do your own research and find out which companies have the lowest occurrence of fraudulent practices. A genuine firm that even issues penny stocks has a proper Board of Directors and a well-managed structure that lets the investor navigate through them transparently.
6. Never share your personal information – Perhaps the biggest mistake potentially new investors make is that they share all of their personal information while signing up for company’s shares including the bank details, account numbers, personal property, and house addresses. Such types of details are only to be shared with financial institutions or those firms that are known to keep personal records of their customers safe. If you provide these details, in the long run a claim could be made that you had authorized these transactions.
7. Too good to be true – Something that is too promising or too beneficial then you need to avoid it. The same situation applies with penny stocks as well. Something that sounds too good to be true should also be avoided at all costs.
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