posted by admin on May 9
A ‘Penny Share’ is a loose term used to describe shares which have a speculative appeal because of their low value. There is no official rule to define when a stock becomes a Penny Share and different observers may use different criteria.
Most brokers will stipulate that a penny share must have a value below some upper limit - which can be anything from 50p up to £3. Others may specify a ceiling on the Market Capitalisation of the company.
In terms of the shares listed on this website we use a combination of the above criteria to decide which companies to feature and so not to miss any shares with potential. We say that a penny share must be one with a share price of less than £1 OR a market cap. of less than £100 million.
The essence of these companies are that they will more than likely only have a small amount of net tangible assets and a short operating history. This is in contrast to shares in large blue-chip companies which will have the stability of a large amount of assets and a long trading history to fall back on. This is what makes penny shares such a volatile proposition and yet in turn makes them such exciting prospects.
Â
posted by admin on May 9
Below are a few examples of different categories of share which most penny shares will fall into.
Young or New Issue Shares
The majority of penny shares and small cap stocks will be young companies which have been operating for only a short period of time or have only recently become public. The vast majority of companies would have at one point started out as penny shares before the growth of the company took them skywards. This shows the fundamental thrill of investing in these types of companies - their potential is limitless.
Recovery Shares
These are companies which were once performing much better and have now, for one reason or another, fallen out of favour seeing their share price tumble significantly. These companies then offer the potential that they may be turned around, usually through business restructuring, and may return back towards their former glories.
One extreme type of recovery situation may be a shell company. This is a company that has no significant assets or operations, possibly because it has ceased trading, but is structured for new management or for a substantial shareholder to seize control causing an upturn in its prospects.
Cyclical Shares
These are shares that rise and fall in value according to the economic climate or a certain business cycle. These shares will fall and rise in relation to their particular industry sector or may be tied to the overall state of the economy. Investors will ideally look to invest in the stocks at the bottom of the cycle before the upturn. Typical cyclical stocks may include those in the transport and automobile manufacturing sectors which tend to prosper in growing and expanding economies and tend to do poorly during down business cycles.
Defensive Shares
The opposite of cyclical shares, these are stocks that tend to do well in periods of economic depression. They are generally companies whose products or services enjoy steady demand and therefore become more popular when less steady industries may become too risky. Defensive shares can be found in industries such as food and utilities - things that consumers will not tend to cut back on during periods of belt tightening.
Internet Companies
These are exceptionally volatile companies as they offer little or no tangible assets to provide stability to the share price unless they are a traditional ‘bricks and mortar’ company who have diversified into a web based company. Share prices in internet companies may rise and fall rapidly in short periods of time, often amplifying any movement in the sector as a whole.
Biotechnology Companies
Young biotechnology companies can make for very speculative investments. Often fewer than 10% of their products will reach the development stage but this can make them extremely exciting prospects as one successful product could send the share price rocketing.
Â
posted by admin on May 9
Penny shares in the UK may be traded on one of a number of markets or trading facilities.
The most favorable place for penny shares to be listed is on the Alternative Investment Market (AIM). This is a market which opened in 1995 specifically to give smaller, younger companies access to the public markets and helps to increase their profile and credibility as well as making it eligible for a number of tax benefits.
Some companies may be listed on the London Stock Exchange’s (LSE) Main Market - what most people would identify as ‘the UK stock market’. The main market differs from AIM in that the company would need a minimum market capitalisation as well as having a minimum of 25% of its shares in the public domain. The LSE will also only admit companies with a 3 year historical trading history. By comparison AIM does not have such stringent stipulations and is more lightly regulated. The main market is where you will find many of the recovery shares mentioned previously.
Under the umbrella of the main market are a number of individual groupings for special sectors such as techMARKâ„¢ - the market for cutting edge technology companies. There are also a number of indices which can be used to track the performance of the market, such as the FTSEâ„¢ AllShare, which covers all the shares on the market, and the FTSEâ„¢ 100, which covers the top 100 companies.
A further market where Penny Shares may be traded is on the Off Exchange (OFEX). This is an independent market which concentrates on small and medium enterprises and will also include many companies from outside the UK and around the world. OFEX is not a regulated market and companies on it are officially ‘unlisted’, however many see it as a springboard for listing on the Main Market or AIM.