Penny Shares

What are Penny Shares

Penny Shares have the following characteristics:

• Share price of less than $1.00
• Market Cap. Of less than $100million
• Bid / Offer spread greater than 10%

Penny Shares have the potential for explosive capital growth, however whilst they have universal appeal we would only recommend sophisticated investors add them to their portfolio due to their increase risk.

What are US Penny Stocks

Penny stocks trade below $5 in the US. As they are small, low-valued businesses, they offer higher risk and reward to traders. US Penny stocks are regarded as a more speculative investment than larger businesses because they are geared for growth, with many yet to generate any income.

Penny Shares Risk Warning

Standard Regulatory Risk Warning for Penny Shares

There is an extra risk of losing money when shares are bought in some smaller companies including ‘Penny Shares’. There is a big difference between the buying price and the selling price of these shares. If they have to be sold immediately, you may get back much less than you paid for them or you may have difficulty in selling them. Past performance is not a reliable indicator of future results. The price may change quickly and it may go down as well as up. You could lose every penny put into a particular share.

Characteristics of Penny Shares

Small Cap. shares generally share one or more of the following characteristics. It is these characteristics that often make these minnows of the market attractive to investors.

• Penny shares may be oversold situations
• Small cap. shares may be Asset backed investments
• Micro caps. may be Undervalued opportunities
• Penny stocks have the potential for explosive capital growth
• Penny shares may have no net asset value such as mining stocks
• Penny stocks and shares are some of the most exciting equities classes on the market
• Many growth companies are penny shares
• Lots of UK household names started out as penny shares
• Many silicon valley companies start out as penny stocks

How do Sophisticated Investors and Brokers Research Penny Share situations?

Penny Share and Small Cap Research

Comprehensive, detailed and penetrating company analysis is a must when looking at micro cap situations anywhere in the World. Every company must first be the subject of a detailed research programme.

Intelligence gathering

Intelligence gathering involves assimilating public domain sources of information on the company, from Bloomberg to investment newsletters and websites. For AIM-listed companies, there isn’t usually substantial published material, so you have to know where to look.

Personal contact with management

Sophisticated Investors should also obtain opinions from the house broker on issues such as performance and management ability. Depending on level of investment meetings with the company’s management, for a face-to-face evaluation may well be an option. These meetings are particularly useful and give investors the opportunity to thoroughly assess a situation.

Full disclosure

Be sure to get the complete picture, ‘warts and all’, and ensure you have all the facts at your fingertips to help you make your investment decision. It’s an attitude towards transparency that takes the regulatory framework as the minimum level of action, not the maximum.

What is a UK listed small cap?

The oft-bandied phrase ‘small cap’ is used to cover a diverse spread of UK listed smaller quoted companies, including penny shares. The industry classification of a penny share is one with a market cap of less than £100 million and/or a share price of less than £1 with a bid/offer spread greater than 10%.

It has been argued that smaller companies do not usually have the financial strength enjoyed by the weightier stocks, thus making them more vulnerable to commercial setbacks and economic downturns. However, we need to bear in mind that ‘minnows’ are able to adapt themselves rapidly in response to changing conditions, which may lead them to outperform their larger cousins. This is a fact sometimes overlooked in the mainstream media. Having decided to consider the small cap sector, the overriding factor has to be having access to the right information, which, in the case of the small cap sector, is both sparse and difficult to find.

Buy Penny Shares

Penny shares can be traded in the UK on a number of markets and trading organizations, but where and how do you buy penny shares?

The best place to list penny shares is the Alternative Investment Market (AIM), and it is one of the most popular trading organizations in the UK with more than 1,000 members.

The market was opened in 2010 to enable small and young enterprises in particular to access the public market, to improve their profile and credibility and to qualify for a number of tax advantages. The main market differs from AIM in that it requires a minimum market capitalization and does not have a public sector, but companies can list in what most people would call the UK stock market. The LSE will also only allow companies with a three-year trading history to list on the London Stock Exchange or the City of London.

By comparison, AIM is less stringent and less strictly regulated, and is less regulated than the main market, but still subject to the same rules as the LSE.

The main market is the one where many of the above-mentioned leisure assets are located, and includes the LSE (London Stock Exchange), the FTSE 100, the NASDAQ (New York Stock Exchange) and AllShare. The main markets are composed of a number of indices, such as the S & P 500, the FTSE 100 and All-Share. There is also an index that can be used to track market performance: the all-stock market, which covers all stock markets.

Trading in penny shares is one of the most exciting ways to invest your money, and few things can attract the same attention as the value of a penny share on the London Stock Exchange, the world’s largest stock exchange. These opportunities can often correspond to risks by their very nature, but they are also one of the most exciting opportunities in the investment world.

The price may at any given time be disproportionate to the underlying value of the share. A 10p share price can go up 50% on good news, but vice versa a penny can fall more than a larger share. The risk of the gains is that penny shares generally have a thin market and the price of a share rises with the market.

A particular volatility occurs when a predator shows interest in buying a company and the share price can soar in the event of a controversial takeover bid, which would bring considerable returns to small shareholders. If a takeover occurs, the price quickly drops, often to the previous level. The fundamental nature of investing in penny shares is much more volatile than current share prices at any other time of year.

Key Facts of Investing in Penny Shares

Aims

A Penny Share is classed as one costing less than 100p in a company that is valued at less than £100 million and which has a bid-offer spread of 10% or more of the offer price.

The aim of your investment is to achieve a high percentage capital gain should the company’s fortune improve and the share price rise. While short-term growth is obviously preferred, investors should appreciate that there are no set time limits to the duration of investments in Penny Shares.

Your Investment

Penny Shares can be bought and sold in exactly the same way as other shares, that is, the buyer pays and/or the seller receives the price quoted at the time of each transaction. An investor is free to buy and sell their shares at any time so long as market trading conditions allow. Like all shares, the price of Penny Shares can go down as well as up, so an investor risks losing all of the money invested.

Risk factors

Penny Shares can be a very risky investment because:

• the company whose shares are being sold may only recently have been set up
• the company may have suffered financial difficulties in the past
• it is unlikely that the company will pay a dividend
• the shares can be very difficult to sell
• the share price may be very volatile
• there is a significantly wider percentage “Bid-Offer Spread” than in, say, FTSE-100 shares because of the risk involved
• the “Spread” means that if you have to sell the shares immediately, it may mean doing so at a significant loss

Are penny stocks a suitable investment for me?

What type of investor should consider purchasing Penny Shares?

Penny Shares pose a greater risk to an investor than those in larger companies and, as a result, no-one should consider trading in them unless:

• they can afford and are prepared to lose all of the money they invest in “Penny Shares”
• they have experience dealing in stocks and shares
• they already have a share portfolio
• they have less than 20% of their share portfolio invested in speculative shares
• they own their own home
• they have at least 3 months expenses on deposit in their bank or building society
• they have made adequate provision for their retirement.

Who should NOT invest in Penny Stocks?

Penny Shares are an unsuitable investment for a great many people. Under NO circumstances should the following people consider investing in Penny Shares:

• the unemployed
• students (including business students)
• those who cannot afford to lose any of their savings or capital
• those who have no experience of investing in stocks and shares
• those with no savings, “blue-chip” share portfolio or retirement provision
• those with little or no assets
• those who would have to borrow money to buy the shares

Sophisticated Investor Penny Shares

You won’t find any tips or recommendations on this site. We believe that what you will find is a succinct and comprehensive information resource for the UK small cap sector. It’s a fact that Penny
Shares may offer up huge capital growth opportunities, but researching them can be a daunting task, as those who are existing penny shareholders will no doubt be
aware.

Real Life Penny Share Example

People invest in penny shares because they believe they have a chance of making a sizeable profit. Make no mistake, most penny stocks don’t achieve this feat, but it’s still worth looking at the stock’s track record to see how significant growth can be if you do. If you can pick a penny share that will show up big later, imagine returns in the four-digit percentage range. So where returns are available, there is huge risk and make that mistake.

Founded in 2000, ASOS is a popular online clothing company serving the UK and international markets. The company was listed on AIM after just one year and was valued at just over £14 million at the time. Although ASOS shares have crashed from their 2018 highs, the company is still worth more than £3billion today. One of the reasons UK investors are betting on penny stocks is because of their low barrier to entry. This means that the cost of a single share is so low that you have the chance to buy a significant number of shares.

Take ASOS for example: a PS1000 investment would yield you 4,166 shares, but a company like British American Tobacco is listed at 2,785 pence, meaning you would only get 37 shares for your PS1000 investment. If the penny shares of a company become large in the future, then you have the opportunity to hold a much larger number of shares in that company.

While FTSE 100 stocks are limited to just 100 companies, there are hundreds of penny shares to choose from. AIM – listed company with a market capitalization of less than £1m and a dividend yield of 0.1 per cent. This allows you to diversify into dozens of different penny stocks, but theoretically you only need one tip to achieve a healthy return. They will then have more than 600 companies in the FTSE share index, many of which will fall into the Penny Shares range.

Top UK Penny Shares

Penny Shares List

Top NASDAQ / NYSE Penny Stock List:

Top OTCQX Stocks List:

Top OTCQB Stocks List:

Top Pink Sheets Stocks List:

Penny Shares Glossary

• • AGENT Any person who acts on behalf of another
  • ALTERNATIVE INVESTMENT MARKET A share trading mechanism established and regulated by the London Stock Exchange
  • BID-OFFER SPREAD The difference between the ‘Bid Price’ and the ‘Offer Price’ which can be expressed as a percentage of the ‘Offer Price’
  • BID PRICE The price shown by a ‘Market Maker’ at which an investor may sell shares, so long as the number of shares does not exceed the indicated ‘Market Size’. The ‘Bid Price’ is not a guaranteed selling price when a transaction is in excess of (outside) ‘Market Size’.
  • EARNINGS PER SHARE The profits of a company, after tax, divided by the weighted average number of shares the company had in issue during the accounting period.
  • GEARING A ratio between a company’s borrowings and its share capital or ‘shareholders funds’ which is expressed as a percentage. High gearing means a proportionately high level of debt and vice versa.
  • HOLDING COMPANY A company that controls one or more other companies.

• LIQUIDITY The degree of ease with which an asset can be turned into cash. A ‘liquid market’ is one with many buyers and sellers where dealing is usually easier and shares have a narrow ‘Bid- Offer Spread’
• MARKET CAPITALIZATION The value of a company calculated by multiplying the number of shares in issue by the ‘Mid-Price’ of the share.
• MARKET MAKER A person (effectively a middleman) who is prepared to buy and sell shares at prices determined by them. The market makers also determine the ‘Market Size’ and ‘Bid- Offer spread’.
• MARKET SIZE An indicated number of shares in which a ‘Market Maker’ is willing to make a transaction at the ‘Bid’ and ‘Offer’ prices they are quoting.
• MID- PRICE The mid point between the ‘Bid’ and’Offer’ prices. This is used for many valuations and ratio calculations and is the price shown when companies feature in newspapers.
• NET ASSET VALUE The assets of a company, minus its liabilities divided by the number of shares in issue.
• NOMINAL VALUE The ‘value’ of a security as printed on a share certificate, e.g. ‘Ordinary 10p Shares’. Also called ‘par value’ or ‘face value’, the measure has no bearing on the actual price of a share on the open market.
• OFFER PRICE The price shown by a ‘Market Maker’ at which an investor may buy shares, so long as the number of shares does not exceed the indicated ‘Market Size’. The Offer Price is not a guaranteed buying price when a transaction is in excess of (outside) ‘Market Size’
• PLACING A method of raising money for a company. Usually, a placing is effected by institutional subscription to a new share issue, which is not open to the general public.
• PRICE/EARNINGS RATIO The mid- price of a share divided by the earnings per share, provides a multiple of a company’s market value to the profit it makes. For loss- making companies the measure is irrelevant.
• RIGHTS ISSUE Where a company offers new shares, on a pro rata basis, to its shareholders at a set price. Unlike an ‘Open Offer’ the shareholders can potentially make a capital gain without actually paying for the Rights Issue shares.
• YIELD The annual income from a share based on its current price. Yield for an individual investor will depend on the price they have paid for the share.