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Apply these three essentials to your investing for a successful future
Penny Share investment essential #1 –
Decide on your buy range, and stick to it
Penny shares are volatile. They often move 10%, 20% or even 30% in a single day. Now, the biggest mistake green investors make is buying a share at ANY cost. I’ve seen many investors buying a share after it jumped 30% in a day, just to see it drop back to its initial level the following day.
First, you have to decide on a buy range before you even place your order to buy a penny share. Once you’ve decided on that level stick to it.
The easiest way to do this is to set a limit order. Basically this means you tell your broker (or enter it on an online platform) that you only want to buy a share below a certain level.
If the share goes up higher than that, you won’t buy. Yes, you could lose out on one or two opportunities this way. But there are hundreds of buying opportunities on the market every year. And more importantly, when a share jumps in a single day, it can pull back.
And that’s the buying opportunity you should wait for.
Penny Share investment essential #2 -
Always remember the importance of the "L" - word
Investors often overlook how important liquidity is. Penny shares aren't well known and there are far less people trading them than the big blue chips. So it does actually happen that there simply aren't buyers or sellers for a share at any one time.
This makes these stocks volatile. For example, if there are suddenly no buyers for a share, what is its price? 1c? 2c? nothing?
And similarly, if there are no sellers for the share, is its price now infinity?
Here you need to remember, you are buying into a business. The business is worth something (which I try to estimate correctly when we buy) but the market won't always give that business a price that reflects its value. Simply because there often aren't enough buyers and sellers. Not because there's anything wrong.
But, this means you need to watch out for low liquidity. Never buy more than 10% of a share's daily volume traded.
So, if a 10c share trades 1 million shares on average a day you shouldn't buy more than 100,000 shares (or R10,000) worth of the share. This makes it possible for you to easily sell it later, even if its liquidity dries up a little.
The rule of thumb is to stick to around 10% of the share’s daily volume as a maximum.
If however you buy R100,000 worth (all the shares that trade on a day) you will also need a whole day's worth of buyers when you want to sell later on. And if it happens that liquidity is lower by then - well then you're going to struggle to sell your shares.
Penny Share investment essential #3 -
You only need a small amount of money per share to make big money
Most investors I speak to believe they need to buy hundreds of thousands of rands in a share to make decent money from it. But you don't.
The shares we look at are speculative. Although they have a high risk level they have big potential.
And, while most of the shares in our portfolio will give you gains like 40%, 50% or maybe 100% in a year's time there will be BIG winners.
But what you need to realise here is that ALL you need is one or two shares to soar 5,000% in your LIFETIME to make big money.
Take Shoprite for example. The share traded at 550c in May 2004.
If you bought 3620 shares you would've needed R20,000. At that stage the share routinely traded up to R10 million worth of shares per day. So you’d be fine with liquidity.
Today the R20,000 you invested in Shoprite would be worth R742,000, and that’s excluding dividend income.
ALL you need is for something like that to happen ONCE in your lifetime and you're set.
If you still think you need to put millions into penny shares to make money, well then you've got too much money to invest in penny shares in the first place. And you'll be better off looking at venture capital or private equity to make big money.
And if you thought you didn't have enough money to make good money on penny shares - well think again!
Keep these three essentials to investing in penny shares in mind at all times.
It'll help you make smarter decisions when investing. And hopefully keep you on the right, profitable road to penny share success!
Here’s to unleashing real value