Penny shares: What you need to know about investing in the stock market’s smallest companies

Julie Brownlee, Fsp Invest, 14 Apr. 2015

Tags: penny shares, penny stocks, what are penny shares, investing in penny shares, stock market, investing in small companies

If you’ve looked into investing on the stock market, chances are you’ve come across the term penny shares.

So what are penny shares? Where can you find them on the stock market? And should you invest in them?

Read on to find out…

What are penny shares?

Generally speaking, penny shares are stocks trading on the Johannesburg Stock Exchange (JSE) for less than R10.

They tend to have a market capitalisation of less than R1.5 billion. The market capitalisation is the number of shares a company has in issue multiplied by the current share price.

Where can you find penny shares on the stock market?

On the JSE, you’ll find penny shares on the main board mostly in the small-cap index. This means you find them in almost every sector of the stock market.

You’ll also find them on the JSE’s AltX. The AltX is the JSE’s alternative exchange. It has less arduous listing requirements that the main board, making it easier for smaller companies to list and benefit from becoming a public company.

What to consider before investing in penny shares

Investing in penny shares requires the same research and due diligence on your part as investing in any other share listed on the stock market.

Penny share investing comes with higher risks than investing in the stock market’s large companies, but with this risk comes higher reward. They have huge profit potential.

This means you need to manage your risks when investing in these shares. Ensure you run stop losses and only invest a small portion of your portfolio into these more speculative shares.

You also want to check out the liquidity of a share before investing. Shares with low liquidity can be harder to sell. Your stock broker will be able to advise you on this.

As long as you understand the higher risks involved with investing in penny shares and you’re prepared to do through research, penny shares could be a profitable addition to your portfolio.

So there you have it. What you need to know about investing in the stock market’s smallest companies.

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