Penny stocks – those costing less than £5 or $5 – can be bargains if you choose wisely. But watch out for fraudulent scams trying to manipulate the market.
We’ve all probably had those spam emails promising ‘awesome’ returns on a hot new biotech company that has developed a cure for cancer and whose stock is about to go through the roof.
Hopefully we’ve consigned those to our junk folders where they belong – someone is trying to make a fast buck by illegally manipulating the market, and you would be the fall guy.
But that doesn’t mean there aren’t really bargains out there in the penny stocks market – though you need to do your research carefully, or you could get your fingers badly burned.
What is a penny stock?
So just what is a penny stock? First of all, they don’t literally cost a penny, although you can find some for under 10p per share. The definition now loosely covers shares trading for less than £5 in one of the smaller markets such as the UK’s FTSE SmallCap or the AIM All-Share indices. In the US, the term refers more specifically to stocks worth less than $5 trading with the OTC Markets Group or FINRA’s OTC Bulletin Board.
There are certainly bargains to be had – the FTSE SmallCap index, featuring smaller capitalisation companies on the London Stock Exchange (LSE) main market, rose 43.7% in the five-year period ending April 26, 2017. Stocks range from household names such as Moss Bros and Mothercare to small-scale tech and pharmaceutical companies.
Meanwhile the LSE’s AIM market, launched in 1995, lists more than 3,500 businesses from around the world, including early-stage and venture-capital enterprises, as well as more established companies. The FTSE AIM All-Share index rose 19.2% in the five-year period ending April 26, 2017.
If you’re keen to take advantage of the huge gains that can be made in the tech and pharma markets thanks to the rapidly changing pace of technology, then there are certainly opportunities to make big gains out there. One only has to think of names such as Facebook and Twitter to see the potential, if you can catch them early.