Invest in penny shares

Invest in Penny Shares

What are penny shares?

Before investing in penny shares you must know what they are. Penny shares in the UK are defined as pretty much any stock or share in companies with a small market capitalisation (typically under £100m). They are often easily identified because many of them have very small share prices (again typically under £1).

In the US penny shares (or penny stocks as they are more typically known are defined as any stock that is not listed on one of the major exchanges (NYSE, NSADAQ or AMEX).Defining a penny share in any country is not a science and in reality the term often refers to any shares of a small company which may be suseptable to dramatic changes in value.

Why invest in penny shares?

If you want to invest in penny shares it is absolutely crucial that you first understand the advantages and disadvantages to investing in these kinds of stocks. One of their main features is that due to their often very low price (usually a few cents or pence) any news that breaks surrounding the companies future prospects can have a dramatic affect on the share price. For example assuming a share has a price of 4 pence and the company announces it has just signed a major contract with the regional government providing guaranteed revenue over the next 5 years, causing the price to rise to 4.5pence. This may not seem a huge rise however in percentage terms it represents a 12.5% rise in the value of your investment.

You won't have to look far on the internet to read fantadstic stories of penny shares that used to trade for a few pence that are now worth a few pounds. Such cases do happen regularly and provide the investors with tremendous returns that cannot be matched elsewhere.

The best word available to describe penny shares is volatile. Volatility should be respected by investors, but also explored as it can be both a threat and an opportunity to the investor. If you have a particular belief in a concept or idea that you believe will make a company a success then if it has penny hshares in issue you may decide to invest. One great tip is to set stop loss limits on your penny stock investments to try to limit your downside. However be warned that these shares are often not as liquid as mainstream equities so you may not be able to sell at your limit price.

Researching penny shares

There are no end of newslatters and website subscriptions that promise to bring you the latest penny share prospects, many of which tend to disappoint. One that is worth a look however is Doubling Stocks. This newsletter (and the software that picks the stocks) was developed by a couple of guys that used to work for one of the top US investment Banks and is well worth a look.

Trading penny shares

If you decide to invest penny shares you should be prepared to lose all of the money you invest. It is crucial that you already have experience of researching and investing in stocks and shares. Another great tip is to not have too much of your portfolio in your portfolio - as with all investments diversify to avoid substantial downside risk.