Lie #3 – There’s no liquidity in penny stocks
What do people mean by liquidity? Liquidity simply means having enough volume to easily buy and sell your shares. For example, if a penny stock only has two trades, its liquidity is said to be low.
There are not enough traders to buy and sell.
However, if a stock is experiencing huge amounts of trades, thereby indicating the presence of a large number of traders, its liquidity is said to be high because you can easily buy and sell shares.
While it is true that penny stocks don’t have the same liquidity that Blue Chip shares on the JSE have – they don’t need that much liquidity either.
In most cases you won’t have trouble buying or selling R10,000, R20, 000 or even R50,000 in most penny stocks.
Typically, I monitor penny stocks and only invest in the ones where trading volumes are higher than R50,000 a day averaged over a month. Right now, there are 128 penny shares on the JSE with that kind of volumes.
Lie #4 – Penny Stocks sell for cheap because they are bad quality businesses
Penny stocks have low share prices because they are small companies – not necessarily because they are bad businesses.
The fact is that share price simply does not matter — the quality of your investment does.
And there are many penny stocks that are high quality businesses that have been paying dividends for years and growing their profits and market shares consistently.
But, because they are too small for many large institutions (with hundreds of billions to invest) they simply don’t get the attention that bigger companies do.