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How to find penny stocks

by , 05 June 2014

Penny stocks can give your portfolio a boost. By investing some of your portfolio into penny shares, you can try to take advantage of young, dynamic, up and coming companies growing from strength to strength, taking their share price with them. So what exactly is a penny stock? What are the risks? And where can you find them? Let's take a closer look…

What are penny stocks?

In South Africa, penny stocks are generally those that trade for less than R10. A penny stock’s market capitalisation is usually below R1.5 billion.

The market capitalisation of a company is just the current share price multiplied by the number of shares in issue.

If you compare penny stocks with larger blue-chip companies, you’ll see they’re much smaller in terms of market capitalisation.

What are the risks with penny stocks?

As with all things investment, there are risks involved with buying penny stocks. The risks are higher with penny stocks than they are with larger companies, the research team at Red Hot Penny Shares explain.

And because of the small size of penny stocks, the shares can also be more volatile. There’s also a risk of low liquidity too.

Where can you find penny stocks?

There are two main areas that you can look on the Johannesburg Stock Exchange (JSE) for penny stocks.

The first place is the Small-Cap Index on the main board of the JSE.

The second place is the AltX. The AltX is easier for companies to list on in comparison with the JSE’s main board. This makes it easier for smaller, growing companies to list on the stock market.

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Penny stocks become penny stocks usually by listing on the stock market while they’re still small in size. They come to the market to raise capital for expansion and investing in their businesses.

Some penny stocks come from the other way – they were once high flyers but have hit on bad times. These shares can be worth looking at if you focus on recovery stocks.

So there you have it, how to find penny stocks.

How to find penny stocks
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