A large number of well-established companies were once trading for less than $5 a share, including Ford, JD Sports and Monster Beverage. Those who invested in these companies during their penny stock days could have made a substantial gain over time. Read ahead for everything you need to know about penny stocks, and how-to identify good penny share opportunities.
Penny stocks or penny shares are a common stock that trade for less than £1 on UK stock exchanges or less than $5 on US stock exchanges. The low share price means the stock is likely to be a highly speculative investment.
Although the original definition of a penny stock is a stock that is valued under £1 or $5 in the UK and US respectively, they have been expanded to cover stocks valued over these guideline prices. In New Zealand, these assets with low share prices are also called "micro-cap stocks", and the Securities & Exchange Commission (SEC) are described as any stock under $5. They are usually characterised by very high volatility and are seen as higher-risk stocks, with the possibility of significant growth.
The appeal of penny stocks and penny shares is easy to see. If you have $1,000 to invest, you can get a considerably larger share percentage in a smaller company whose shares are trading for a few pence, rather than buying blue-chip shares which may cost much more for an extremely small percentage of ownership. And of course, if your penny share one day goes on to join the blue-chips, you could end up making large returns with the right trading strategy.
Penny stock markets are well known for being extremely volatile, and price fluctuations of around 20% are very common. Therefore, it is essential to conduct a thorough analysis while following your risk-management strategy before deciding whether or not to go forward with any trading decision. It is also best practice to trade in industries where there is large market growth as opposed to industries that are declining.
Penny stocks tend to not see much daily trading volume on the stock markets, therefore it often doesn't take a large buy or sell order to move the price. If plenty of people are talking about a penny share, on internet forums for example, that could also influence the price. It is important not to get sucked into an investment just because it has had a large one-day move and you’re afraid of missing out. What goes up quickly can come down even quicker – so make sure your reasons for investing are the right ones.
If you’re happy with your research and have made your trade, another key point is: don’t forget to sell. For example, let's say you are fortunate and the value of the penny stock moves in your favour and, for the sake of argument, it doubles. It can be very easy to sit back and wait for it to double once more. This is not always going to happen, and you should have a strategy in place for when it doesn’t.
When sentiment changes on smaller shares its price can about-turn very quickly, taking all of your hard-won profit, and maybe more. Getting in to the position is only half the plan of trading, in fact some would say it actually accounts for less than that. Where you get out will determine just how successful penny stock trading could be for you.
We offer trading opportunities on thousands of your favourite global stocks, some of which are penny stocks. Penny stocks are often small or start-up companies chasing growth opportunities, though you will also find some big brand names that have experienced steep downtrends in their market value.
Many well-known brands once traded at penny stock levels, including Monster Beverage (NASDAQ: MNST), Ford (NYSE: F) and SiriusXM (NASDAQ: SIRI).
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CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.
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