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Investing in penny shares: Are you up for the ride?

by , 26 June 2013

You might have heard the term ‘penny share' before, but didn't quite understand what it meant or where you could find them. After all, there isn't a sector on the JSE called ‘penny shares'. Today we'll show you how to get involved, but be warned: While the profit potential of these gems is astounding, penny shares aren't for the faint hearted…

Penny shares get the blood racing. Where else could you turn cents into a huge windfall?

You may be wondering what the term ‘penny share’ means…

A penny share is a share with a market capitalisation of under R1.5 billion (you can calculate the market capitalisation by multiplying the total number of issued shares by the current share price) and trading at R10 or under on the stock market. That’s the criteria followed by Red Hot Penny Shares.

Where do you find penny shares?

In South Africa, there are two obvious sectors where you can pick up penny shares. The AltX (the Alternative Exchange) and the Small-Cap Index on the JSE.

While the term ‘penny share’ began with shares in mining companies (these were as speculative as they could be), these days shares that trade at R10 and below are in virtually every sector of the JSE’s Main Board.

Don’t adopt the same attitude about playing penny shares as you would the lottery: Your results will be just as poor

If you want to make money out of penny shares, there’s a lot more work involved than just picking a few numbers.

All the same general rules that apply to other investments apply to penny shares. There’s not a completely different set of investment theories that revolves around them.

The difference between penny shares and blue-chips

The one major difference is the potential rewards are a lot higher with penny shares than they are with blue chip shares. Equally so, the risks with penny shares are a lot higher

The safest and sanest way to invest in penny shares is to buy a collection. This spreads your risk and increases your chances of hitting the really big one. But, at the same time, it reduces the potential devastation a collapsing share would cause if that was the only one you invested in.

Investing in penny shares: Are you up for the ride?
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