What are penny shares?
Penny shares are shares which have a low value. There is no specific price that a penny share has to be for it labeled a penny share, however in the UK Penny shares are often shares with a value roughly between 1p and £1 or less and in the US, less than $1.
Penny shares are popular because any increase/decrease in their value results in big profits/losses for the trader. For example;
- an trader invests £10,000 on two different shares, share A and share B (penny share).
- Share A has a value of £40 and gains 25p. A 0.625% gain. 0.625% of £10,000 = a profit of £62.50p
- Share B (our penny share) has a value of 75p and gains 25p. A 33.33% gain. A 33.33% gain of £10,000 = a profit of £3,333.33!
This clearly show that profits and losses are far steeper with penny shares, which can represent an attractive investment for someone who needs quick money. However there are 3 major downsides when trading penny shares;
- penny shares are lack liquidity and you may not be able to get out of a trade when you want to.
- there are schemes with penny shares whereby someone (crooked Craig), informs everyone (people with little stock market education), to buy a specific penny share (which he already owns), then sells the penny share after everyone he has informed to buy it, buys it. This means crooked Craig has made his profits whilst potentially leaving other people in a dangerously volotile trade.
- penny shares can lose you money as fast as they can help you gain it, however this isn't so much of a down side as this is the case with all investments.
