posted by admin on May 9
Trading in Penny Shares is one of the most exciting ways of investing money. The buzz of watching a stock rise in value from a few pence up to a few pounds or more can be matched by few things. However, by their very nature the possibilities can often be matched by the risks.
These risks and the rewards arise partly because penny shares generally have a thin market. A stock priced at 10p may rise 50% on good news, whereas a larger blue chip stock will not. Conversely, the penny share can fall more sharply than the larger stocks. Its price at any given time may in fact bear no relation to the stock’s underlying value.
Particular volatility may also arise if predators show an interest in purchasing the company. The share price can soar on speculation that there may be a contested takeover bid at a considerably higher value than the current share price, giving all smaller share holders a substantial profit. However, if the takeover does not emerge then the price will quickly fall, often below previous values.
But this is the fundamental nature of investing in penny shares. It’s all about wading through the masses of shares and pinpointing a company where, for one reason or other, you spot potential. Then there is no beating the success and self gratification knowing that you found your own little goldmine.
You may also get involved in penny shares because you have a particular belief in a concept or idea that gives hope for a particular company or perhaps in an emerging industry sector. It may even be because you have some kind of insider knowledge which gives you optimism towards the shares future - perhaps it’s the company that a friend, family member or even yourself works for.
posted by admin on May 9
When deciding which penny shares to invest in there are a wealth of newsletters and websites which you can subscribe to which offer insight and tips and these will often provide a good starting point. However, it is important that you research each company yourself to make sure you pick the ones that are right for you. Personal research will also help you to understand why the share price is rising or falling which in turn will help you to know the right time to sell the shares, or to even buy more.
Ideally a penny share that’s worth investing in will have a net asset value per share that is higher than the share price itself. This means that the company is valued more highly than its various liabilities, namely its debts. This will help the company survive through leaner times and will give it more chance of raising more funds to push forward where necessary.
However, you will not always buy penny shares on value grounds. Some shares may be worth nipping in and out of, providing you keep a sharp eye on the share price and are prepared to jump ship when the time is right whether the price has risen or fallen. You should always be prepared to take losses. You will also find some shares in which it is worth investing for the longer term and where you should be prepared to ride the storm through rocky periods to reap the rewards.
For the greater returns you should always try to predict growth in stocks rather than reflect trends. For instance if you discover that a pharmaceutical company is about to publish good results for tests on a new drug, or that a resources company is soon to report good news on an investigation for potential new mining sites, you should invest early. If the share price graphs do not currently reflect this information you could be onto a winner.
To find the right penny share to invest in you need to look into as many aspects of the company as you can. Learn how the company makes its money and look into the management who run the company. You should assess the companies’ management for both leadership and technical ability - a good combination of the two should predict a bright future. If a company has been floundering then a positive change of management may be imminent and this would be a great time for you to reassess its potential.
Some of the things you should look for are:
- Strong business plan and results - if they are making more money than they are spending and if their operational plan makes sense.
- Trading volume - a high trading volume will make it easier to buy and sell shares, and will also magnify any price rises.
- A trend of improvement - if the company seems to be making more money year on year this will give the company momentum and will eventually be reflected in the share price.
- High visibility - the company publishes regular financial reports.
posted by admin on May 9
When investing in penny shares you should be prepared to lose money. It is best that you already have experience in dealing stocks and shares. Some brokers recommend that you do not invest more than 20% of your entire share portfolio in these speculative shares. It is also recommended that you own your own home and that you have already made sufficient provision for your retirement.
If you cannot afford to lose any of your capital, have little or no assets, or you are a student or not in steady employment then you should not be thinking about dealing in penny shares. Under no circumstances should you borrow money to invest in penny shares.
What now?
That’s the end of our brief guide to the world of penny shares. Next, you should familiarise yourself with some of the many terms you will come across with our comprehensive glossary.