What are penny stocks
In this article we look at penny stocks, what they are and our take on them. As always we are not financial advisors and you always seek the advice of one or do due diligence. Stock prices are volatile and you can make money but also lose a lot.
What is a penny stock?
A penny stock is a unit of common stock that trades with a low share price: these are below £1 in the UK and below $5 in the US.
The companies will also have a lower market cap: this is under £100 million in the UK and under $300 million in the US.
These stocks are often considered higher risk investments, the general thinking for a lot of people is finding the ‘next big thing’ and capitalizing on the stock price if it was to suddenly take off. These companies will not pay dividends – normally.
Now its important to realise that these companies are not just listed on the smaller markets like FTSE AIM, some are actually FTSE 100 or FTSE 250 companies. Currently Lloyds bank and Vodafone are under that £1 per share
Lloyds Banking Group plc – 49.27
Vodafone Group plc – 91.88
Now there are obviously reasons for this, banking has taken a hit and retail has also taken a battering and obviously the pandemic to put it mildly has had a huge impact. The point is established companies can have low prices stock or the price can drop, its then up to you to decide whether it will recover and then invest before this happens and take advantage of potential big gains.
Penny Stock Analysis
Like all stock it is important to do some basic analysis
This is the list of categories on Freetrade web site – your online dealer or app may have a similar screen or way of selecting stocks but as you can see they are nicely categorised
Now lets click on the Mining icon and look at those companies
This is only a small selection that you can trade with the app – as you can see looking at the pounds symbol and the price, there are a couple of stocks that fit into the penny stock category
I selected Alien Metals Ltd from the listing and visited https://simplywall.st/, this site allows some basic analysis. You can search by the name or the ticker symbol
This was the basic analysis – now if you pay money you can get more data and there are other sites you can get this level of information from but for me that was a lot of red flags and worrying signs.
Earnings have declined by 9.6% per year over past 5 years
Has less than 1 year of cash runway
Makes less than USD$1m in revenue ($0)
Volatile share price over the past 3 months
Shareholders have been diluted in the past year
Does not have a meaningful market cap (£28M)
The declining revenues, revenue warnings and the dilution of shareholders were warning signs not for me personally.
Now after doing that its basically going through a lot of these companies in various categories and seeing if any are appealing – yes, its a lot of work but take a note of any you like the look of.
I also have a Hargreaves Lansdown account and you can also look at prices over the last 10 years, news for the stock, you can download reports, you can see director deals, see financial information and more – between these sites you can build up a solid picture of a company. As I have said this is time consuming.
Penny Stock Strategy
The important word here is diversification, it doesn’t really make a lot of sense putting £300 in one company for example – that is a big gamble but you could buy 30 companies at £10 a go. That would spread the risk around, it also allows you to focus on certain categories or niches. You do not want your exposure
Of course you want to spend £10 and if that stock doubles to say £20 then sell or hold on to see if the company really starts booming
What you should do is to think of What categories interest you, What categories are currently popular or may be popular in the near future. Lets see some examples.
Green energy – Whether you believe it in or not a lot of money and investment will be going into green and renewable energy, this may be the big boom in the next 10 years
Blockchain – The use of the blockchain i snot going away and no this doesn’t mean cryptocurrency its the usage of the blockchain technology
Artificial Intelligence – Again, like blockchain this is not going away and when you look at the money which has gone into the company that owns ChatGPT recently you can see this will be another hot category
Now for some established categories
Mining – Whatever you think of mining its not going anywhere with the scramble for resources, political situations and the need for minerals and precious metals not stopping anytime soon, a company which invests in this is worth watching
Pharma – We are not talking about the big players, this is your smaller companies that may have new drugs and innovations in the space.
