Lyla Lindsey
Penny stocks in Australia, also known as 'micro-cap' stocks, are small-cap stocks with small market capitalisations, usually below $50 million. They are typically shares of fledgling companies that are yet to turn a profit, and they are characterised by very high volatility and are seen as high-risk stocks. Penny stocks are often small or start-up companies chasing growth opportunities, but they can also be big brand names that have experienced steep downtrends in their market value. They are attractive to investors because they are cheap and can potentially bring large returns. However, they are incredibly risky, with a very high potential for fraud and loss.
| Characteristics | Values |
|---|---|
| Definition | Stocks valued at under £1 or $5 in the UK and US respectively, but in Australia, penny stocks refer to companies with a market cap of less than AUD 50 million. |
| Risk | Penny stocks are high-risk investments with a very high potential for fraud and loss. |
| Volatility | Penny stocks are highly volatile, with price fluctuations of around 20% being common. |
| Trading volume | Penny stocks have very low trading volumes, with few buyers or market makers. |
| Investment strategy | A common strategy for making money in stocks is to adopt a buy-and-hold strategy, rather than frequent buying and selling. |
| Research | It is important to research and choose companies to invest in, considering factors such as the company's future outlook, financial performance, and achievements. |
| Broker | A third party, or 'broker', is required to conduct the actual transaction of buying or selling shares. |
| Minimum investment | Most brokers require a minimum first trade of $500, referred to as the 'minimum marketable parcel of shares'. |
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What You'll Learn
Penny stocks are high-risk, low-priced shares
Penny stocks are a class of low-priced, high-risk public company stocks. In Australia, penny stocks are referred to as 'micro-cap' stocks, which are shares of small companies with a market capitalisation of less than AUD 50 million. Penny stocks usually have a share price below $5 per share, with some as cheap as 10 cents.
Penny stocks are typically shares of fledgling companies that are yet to turn a profit. They are characterised by their high volatility and are considered higher-risk investments. The low share prices of penny stocks can be appealing to investors as a small increase in stock price can result in a large percentage gain. For example, a move from 50 cents to $1 per share is a 100% gain. However, this also means that losses can occur just as quickly as gains.
Penny stocks are often associated with a high potential for fraud and loss. They are very speculative investments that may not deliver on the illusion of exponential growth they present. Due to the low trading volumes, investors may find it challenging to sell their penny stocks, even if they appear to be making paper profits. It is important to thoroughly research and understand the risks associated with penny stocks before investing.
Despite the risks, penny stocks can provide opportunities for investors with limited funds to gain exposure to the stock market. Micro-investing apps in Australia, such as CommSec Pocket, Sharesies, and Raiz Invest, offer access to the stock market for a small monthly subscription fee. These apps allow investors to buy fractional shares of big, reputable public companies with as little as $5 or even less.
When considering investing in penny stocks, it is essential to have a comprehensive understanding of the stock market and the ability to manage risks effectively. Investors should be prepared for potential losses and have a well-defined trading strategy in place.
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Research penny stocks and their market volatility
Penny stocks, also known as Over-the-Counter (OTC) stocks, are typically stocks that trade for less than $5 per share. They are often associated with extremely high risk but can potentially deliver extremely high rewards. Due to their low share price, penny stocks are usually issued by small companies with shaky track records.
When researching penny stocks and their market volatility, it is important to understand the underlying factors that drive their volatile nature. Penny stocks are typically associated with small companies that may exhibit higher volatility due to various factors such as business stability, industry dynamics, and market sentiment.
To make informed decisions, investors should analyse the financial health and stability of the issuing company. This includes reviewing financial statements, annual reports, and assessing the company's business model, management team, and competitive advantage. Additionally, understanding the industry in which the company operates is crucial. Some industries may be more prone to volatility due to regulatory changes, technological advancements, or economic cycles.
Market sentiment and news can also impact the volatility of penny stocks. Positive or negative news, analyst reports, and overall market conditions can influence the demand for these stocks and their price movements. It is important to stay informed about market trends and developments affecting the specific industry or company.
Traders can benefit from the large price fluctuations that volatile penny stocks experience daily. However, it is crucial to exercise caution and perform thorough due diligence before investing. Websites like Barchart offer resources and lists of penny stocks making notable moves, providing a starting point for further investigation.
Additionally, utilising paper trading platforms can be a risk-free way to test strategies before committing real capital. Volatile penny stocks may offer opportunities for short-term gains, but they also carry a higher risk of loss. Thus, it is essential to define your risk tolerance and have a clear investment plan, including exit strategies, to manage potential downsides effectively.
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Understand the buy-and-hold strategy
Penny stocks are low-priced shares of small companies, typically trading for less than $5 per share. They are often associated with startups or companies in niche markets that lack the market presence of larger corporations. Penny stocks are traded on the over-the-counter (OTC) market rather than large stock exchanges like the Nasdaq or the New York Stock Exchange (NYSE). This means companies with penny stocks don't need to follow the same strict rules as companies listed on the big exchanges.
The buy-and-hold strategy involves buying penny stocks at a bargain price and holding on to them until the company rebuilds and gets back on a major market exchange. This strategy requires patience and the ability to withstand short-term price fluctuations. Here are some key considerations for implementing the buy-and-hold strategy in the Australian stock market:
Research and Analysis:
Before purchasing any penny stocks, it is crucial to conduct thorough research and analysis. This includes assessing the company's business model, financial health, and the market potential of its products or services. Understanding financial statements and analysing historical performance can provide valuable insights into a company's stability and potential. Look for companies with strong financials, a positive outlook, and a strategy for growth.
Diversification and Risk Management:
Penny stocks are considered speculative and highly volatile investments. To mitigate risk, diversify your investment portfolio by keeping penny stocks to a small fraction of your overall holdings, typically recommended at 10% or less. Understand your risk tolerance and ensure that your investment in penny stocks aligns with your financial goals and risk appetite.
Long-Term Outlook:
The buy-and-hold strategy is a long-term investment approach. It requires monitoring the company's progress and holding the stocks until the business shows signs of growth and stability. This may involve holding the stocks for an extended period, during which the share price may fluctuate. It is important to be comfortable with potential short-term losses and focus on the long-term potential.
Understanding Market Dynamics:
Penny stocks are influenced by market dynamics and investor psychology. By understanding these factors, you can make more informed decisions about when to buy and hold. Candlestick chart patterns, for example, can indicate short-term price movements and investor sentiment. Staying informed about industry trends, economic conditions, and government policies can also help you assess the potential impact on your penny stock investments.
Working with a Financial Advisor:
Consider seeking guidance from a financial advisor, especially if you are new to investing in penny stocks. A financial advisor can help you navigate the risks, provide insights into market trends, and ensure that your investments align with your financial goals. They can also assist in developing a diversified investment portfolio that includes penny stocks as a strategic component.
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Consider fractional shares and micro-investing apps
Micro-investing apps have helped to democratise the Australian investing landscape, allowing anyone to build wealth, even with just their spare change. These apps are designed to make investing more accessible for beginners. With features like auto-investing, fractional shares, round-ups and more, micro-investing is suitable for anyone looking for a convenient and affordable way to start building an investment portfolio.
Micro-investing platforms are almost always online and are usually smartphone apps. You can often buy fractional shares, so you can get started even if you can't afford full units. For example, some apps allow you to buy $0.50 worth of Rio Tinto stock, the share price of which trends close to $120.
Sharesies is a micro-investing app that allows users to invest in over 8,000 companies and ETFs across multiple markets, including the Australian Stock Exchange (ASX), New Zealand Exchange (NZX), and US exchanges such as the New York Stock Exchange (NYSE) and NASDAQ. Through its fractional investing feature, users need not purchase a whole share but can instead buy fractions or portions of it. This is especially beneficial for those with limited funds but who would like to invest in expensive stocks like Tesla or Apple. It also comes with advanced features typically unavailable in micro-investing platforms, such as trigger buy orders, stop-loss orders, and limit orders.
Stake is an Australian-based micro-investing platform that allows low-cost trading in US and Australian markets. Users will have access to over 2,500 Aussie stocks and ETFs, as well as more than 9,500 investments trading in the US stock exchanges. Premium membership through Stake Black includes added features such as instant funds settlement, market depth data, and access to analyst ratings, among others.
Another micro-investing platform is Pearler, which allows you to invest in 10 specialised ETFs and also set up auto-investing. Pearler charges its customers $1.70 per month if they select 1 fund, or $2.30 per month if they have multiple funds after balances reach $100.
CommSec Pocket is CommSec's answer to micro-investing apps and does away with the higher fees and high minimum trades associated with the regular CommSec platform. With CommSec Pocket, you can invest as little as $50 at a time into an ETF of your choice with a brokerage fee of just $2.
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Know the risks and trading strategies
Penny stocks are a class of low-priced, high-risk public companies. They are typically small or start-up companies chasing growth opportunities, but they can also be big brands that have experienced a steep decline in market value. Penny stocks are also known as 'micro-cap' or 'small-cap' stocks in Australia, referring to companies with a market cap of less than AUD 50 million and a share price below $5 per share.
While penny stocks may seem appealing due to their low prices, they carry much higher risk than high-cap stocks traded on major exchanges. They are highly volatile, and it's easy to lose money due to their small share price; even a small move in the stock price can represent a large percentage gain or loss.
Before investing in penny stocks, consider the following risks and strategies:
- Understand the market and economy: Educate yourself about the economy, interest rates, exchange rates, and government policies. Know how these factors can affect a company's performance.
- Research and choose companies wisely: Start with companies in an industry you know. While past financial performance is important, focus on a company's future outlook, as this drives share prices. Avoid cheap shares with a shaky track record.
- Determine your risk tolerance: Decide how much of your invested money you are willing to lose. Set a threshold for selling shares to minimise losses and protect gains across your portfolio.
- Adopt a long-term strategy: Consider a buy-and-hold strategy, avoiding frequent buying and selling. This helps you avoid missing out on strong annual returns and losing money on transaction costs.
- Monitor and sell at the right time: Stick to your trading plan. If your penny stock reaches your target price, close out your trade. Don't hold on expecting further gains, as what goes up quickly can come down even faster.
- Be cautious of low trading volumes: Penny stocks often have low daily trading volumes, so it might be challenging to sell your shares at the desired price. Be wary of investing based on internet forum hype, as prices can drop quickly.
- Consider alternatives: There are safer alternatives to penny stocks, such as index funds or ETFs, that offer solid historical returns with lower risk.
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Frequently asked questions
Penny stocks are a class of low-price, high-risk public companies. They are also known as "small-cap" or micro-cap stocks, referring to small companies with small market capitalisations, usually below $50 million. Penny stocks usually have a share price below $5 per share.
Penny stocks are considered riskier than high-cap stocks that trade on major exchanges. They are highly volatile, and it is easy to lose money. Penny stocks also tend to have very low trading volumes, so it can be difficult to sell your shares even if the stock value increases.
Penny stocks offer the potential for significant growth. With a small investment, you can gain a large share percentage in a smaller company. If the company becomes profitable, you could make large returns.
You can use a broker to buy and sell shares. Before investing, it's important to research and choose companies to invest in. You can find relevant information in a company's annual report, and its yearly and half-yearly financial results statements.
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