Investing in penny companies. How to invest capital in them?

Investing in penny companies probably has as many supporters as opponents. It is certainly a more unusual company that may seem like a gem on the stock exchange at first. After all, you can't find a better investment in theory. Cheap securities can be purchased in large numbers, counting on their rapid growth. In this article, we will analyze the pros and cons of buying shares in these types of companies.

What are penny companies?

Penny companies are enterprises whose shares cost less than PLN 1. I think that the vast majority of such companies can be found in the alternative trading system, i.e. NewConnect, and less frequently on the regulated market of the WSE. These companies are thus valued by the market for a number of reasons. Investments in them require not only purely analytical practice, in analyzing financial statements and other company documents. In addition, it is worth getting acquainted with the broader history of the security itself.

Penny companies have it that they attract investors with high rates of return. No wonder. If the value of a given enterprise, the share of which costs PLN 50, increases by PLN 1, the quotations go up by 2%. This is a “nice” looking and quite promising rate of return, but analytics from such companies cannot be considered a lottery.

Only for professionals?

I wouldn't say that penny companies are exclusively reserved for professional and seasoned investors. It largely depends on individual preferences. Nevertheless, there is no need to hide that the risk is greater than investing capital in stable enterprises.

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It is worth avoiding golden tips from websites and newsletters. Even the biggest investors advise you to avoid any recommendation. 'Groszówki' are a specific type of companies. Any newsletters that encourage you to buy, unfortunately, have the proverbial "fine print". The author often receives profits from obtaining potential investors. There is nothing wrong with this method of earning, but nevertheless you have to be careful with this type of offer. The "recommendations" of online message boards should be treated with equal caution. Remember that any investment failure is only a result of our decisions. Therefore, it is not worth basing them on incomplete information or general opinions.

Greed cannot earn

Potential the incentive to invest in the shares of penny companies is the possibility of a quick profit, with a high rate of return on invested capital. In the history of quotations of such enterprises, we can find spectacular increases of several dozen percent, sometimes even above 100%. However, it is worth warning against this type of greed. The demand for this type of stock is very limited. Therefore, selling them at the level of 20-40% of the profit on securities is optimal and relatively safe. On the one hand, we deprive ourselves of further potential profits, on the other hand, we protect ourselves against possible withdrawal or lack of interest from buyers.

Sometimes the management board of the company itself is one of the heavy "psychological" barriers to overcome. I am talking about absolute faith in the face of any announcements, for example about improving the situation, while the market realities effectively contradict them. It is worth bearing in mind that the company's management board is a body that cares about obtaining external financing, due to the often lower cost of capital compared to bank loans.

What about liquidity?

Penny companies are largely listed in an alternative trading system, outside the regulated market of the WSE. Therefore, the demand for them is much more limited than for well-known companies listed on the regulated market. How to find penny companies with an acceptable level of liquidity? It is best to pay attention to the turnover. The optimal daily turnover for enterprises whose securities do not fall below PLN 50 per share (we recommend avoiding those below) is about PLN 100. This is a very conventional boundary. With this type of investments, you need to recalculate the risk associated with the inability to draw the invested capital into shares.

It may be a good idea to trade on the so-called small scale. It is known that the smaller the amount of investment, the lower the profits, if it is successful. However, it should also be considered that there is less potential loss in the event that penny securities turn out to be an investment misfire. We could conform to a general assumption that, for example, is shown to us Timothy sykesby suggesting that we should not invest more than 10% of their daily turnover in the purchase of shares.

Chances of success

Penny companies should be approached like any other company listed on the WSE, except that it should be done with particular caution due to the greater risk. What does the statement "like to any other WSE-listed" mean? It is important to analyze it first and assess the real chances of success of the project. Falling in love with an innovative idea or promises of the management board may lead us to keep in our portfolio the securities of a company that may go out of business any day. So I wouldn't say that penny companies are only meant for professionals. It seems to me that people who are aware of the risks involved can freely take an interest in them (continue to invest).