What exactly is a penny share?

Penny shares are shares in small companies. Either they are young companies that could achieve rapid growth. Or else they simply have a low share price. Or both!

Remember, all big companies start out somewhere. Bluechips like Apple and Microsoft came from big ideas. But 20 years ago, they were selling for peanuts. The aim of the game is to spot the young companies with biggest ideas and the biggest potential.

The real trick is to get into a growing company late enough to be convinced it will succeed, but early enough to capture all that growth.

It is vital to understand that a share price incorporates a set of expectations. And the City likes nothing less than a share that falls short of those expectations. So, if a company underperforms, City investors often dump their shares in droves. That’s bad news for investors with their money tied up in that company. But it can be great news if you’re looking for a bargain!

So, the stock market is constantly offering the chance to buy shares at a low price. And if we take the best of those opportunities, we’ll be well positioned to pull in some great potential profits.

Important: Penny shares can be risky

Fact is, these stocks often have a small market capitalisation. And often, not a huge volume of shares are being traded at any one time. You might see that referred to as being ‘thinly traded’. That can mean the share price is more volatile – and any good or bad news can have a large impact on the price.

As you might expect this volatility can work for you and against you…

For example, if a company announces a glittering new deal, the shares could receive a big jolt in value. But if they release news of falling profits, you could see the price fall quite rapidly.

And because less shares are being traded, there won’t always be the same amount of investors looking to buy these shares compared to shares in larger, well known companies. So, they can sometimes be tricky to get rid of if you need to sell them.

Ever heard of the bid/offer spread? It’s one of those geeky terms that basically means the difference between the buying and selling price. And with penny shares, there can often be a big difference between the two.

So investors who want to sell their shares soon after they have bought them may sometimes have to sell at a loss – that might be the case even if the share price hasn’t fallen… and even if it has risen a little. That’s one of the built-in risks of penny shares.

And as new-to-market companies, some of them might not be generating any revenues yet and they might not pay dividends. However, you should keep in mind that it is precisely because they are young, fresh companies that I’ll be interested in them. And I wouldn’t be backing a penny share in the hope of earning small dividend payouts…

Because I’m gunning for companies that offer the opportunity to pull in sizeable market gains.

So you can see, penny shares carry the same risks as larger company shares – the share price can move up and down, so your capital is at risk – plus the additional risks I’ve spelt out above…

I just want you to be fully-clued up on every aspect of penny share investing.

And if you decide to get your name down for The Penny Share Letter today, you’ll receive my comprehensive guides giving you the full low down on small caps… how to trade them, how to maximise your profits, the risks, the dangers, the potential… everything.

And not only will you get a full, in-depth newsletter every month – you’ll also receive up to the minute email updates on a weekly basis, so you’ll be up to speed on every single one of our trades.

If these shares are so risky, why do 1000s of investors buy them?

Growth potential. Plain and simple.

Say for example Royal Dutch Shell is valued at £100bn. If it is going to become twice as valuable, it has to add on that amount of business again. Assuming that’s even possible, it’s going to take time and hard work to achieve that.

But if you have a company that is valued at just a few million then it can double or treble without having to add business worth billions. But bear in mind, Shell might struggle to grow in the next decade, but it’s still likely to be around at the end of it.

There aren’t the same sort of assurances with penny stocks.

Make no mistake, this is speculative investing.

And I’ll be straight with you – it’s often just like taking a punt.

It’s a high risk/high reward dynamic that works for me. I’ve been following the exciting world of penny shares for nearly a decade now. And I find it absolutely thrilling.

Sure, this type of investing isn’t for everyone. And I sincerely believe it’s something you should only be doing with a small part of your spare capital. Money you could afford to lose if things don’t go right for the company.

If you’re not willing and able to take that risk with your money, or this sort of investment sounds too adventurous for you, then dipping your toe in the penny share market is probably the wrong move, for you.

If you do want to invest in penny shares remember that not all companies will be winners. If you can afford to, spread your investment over a number of shares.

So, if you can accept the taste of danger, then I suggest you read the other articles on this website…

Because right now, I’m sitting on several high-potential companies that I believe could could hit some serious stock market highs in the coming months.

You can discover which companies when you get your name down for a 365-day trial of The Penny Share Letter here.