While investing in large-cap or bluechip stocks come with the scope of stable, long-term returns, they are also usually more expensive. Hence, investors looking to invest less and willing to take some risks explore the options of penny stocks.
The Canadian equity market is replete with stocks with smaller valuations. Penny stocks, in particular, often come with growth prospects, although they also carry the baggage of being highly volatile. This is where the importance of an investor’s risk-taking capacity and research skills comes to play.
But before exploring or investing in penny stocks, investors should have a clear understanding of what exactly a penny stock is and where to find them. Let’s find out the answer to these top questions.
What is a penny stock in Canada?
Regulators around the globe have a different set of rules to classify a penny stock. In Canada, a stock qualifies as a penny stock primarily on two conditions —
- Its price must be under C$ 5 per piece
- The company’s market cap should be at least C$ 60 million but not more than C$ 300 million.
What are the positive sides of investing in a penny stock?
Penny stocks are often perceived as an entryway into stock market trading for amateur investors, as they do not require a significant amount of investment.
Seasoned investors also seek out penny stocks for their discounted prices. But along with that, another factor that pull their attention is the possibility of high returns associated with penny stocks. Based on thorough research and mindful investment, investors have been known to earn significant gains off of penny stocks over a certain period of time.
Also, in some cases, penny stock companies can grow to have higher stock price and valuation in the long run, allowing investors to multiply their returns.
What are the negative sides of investing in a penny stock?
It is not all bright and sunny in the world of penny stocks. As pointed earlier, these shares have a tendency of being highly volatile in nature, which is why many investors stay away from them.
Prices of penny stocks can be manipulated easily with market speculations, keeping their market capitalization at the mercy of a dynamic business environment.
This could, therefore, turn out to be a high-risk investment as these stocks are highly sensitive to market chatter.
Penny stock companies, at times, are also found in non-adherence to corporate governance norms, widening the possibility of the company running into regulatory troubles. This can also put one’s investment in jeopardy.
Adding to that, some industry analysts believe that penny stock companies are more likely to have a weak management, which may restrict their business growth despite a favorable environment.
Keeping in mind these factors, investors willing to take the risk of parking their funds in penny stocks are advised to do their research of the company carefully.
Copyright © 2021 Kalkine Media
Where can one find penny stocks in Canada?
Now that we have discussed their pros and cons, let us delve into the whereabouts of penny stocks in Canada.
Canada primarily has three stock exchanges:
- The Toronto Stock Exchange (TSX), which is the primary securities platform in the country
- The Toronto Stock Exchange-Venture Exchange (TSXV), which is junior trading platform for emerging companies
- The Canadian Securities Exchange (CSE), which is an alternative stock exchange
Penny stocks can be found, in varying quantities, in all of these three trading platforms. Let us discuss the different aspects of these stock exchanges.
Toronto Stock Exchange
The Toronto Stock Exchange, one of the largest stock exchanges in Canada, was founded in 1861. It is managed by the TMX Group.
With over thousands of companies listed on it, the TSX comprises enterprises from all sectors of the economy, including energy, mining, technology, utilities, financial services, and cannabis, among others.
It also offers several indices, including the S&P/TSX Composite Index, which is considered Canada’s benchmark index. It has further sector-based indices for an intra-sector comparison between peer companies.
As per its latest market intelligence report, the TSX held a market cap of about C$ 3.7 trillion, as at April 30, 2021.
Toronto Stock Exchange Venture
The Toronto Stock Exchange Venture operates the trading of emerging companies, which mostly hold small market caps and have lower stock valuations.
For this reason, a significant number of penny stocks are found on the TSX Venture Exchange.
The TSXV’s benchmark index, the S&P/TSX Venture Index, holds a bouquet of key companies with small-, mid- and micro-cap companies that are currently outperforming their peers.
The junior stock exchange, holding over 1,600 listed companies, also has a number of sectoral indices.
Canadian Securities Exchange
The Canadian Stock Exchange, also based in Toronto, reportedly has about 670 securities listed on it and is one of the major stock trading platforms in the country.
The stock exchange, which began its operations in year 2003, is run and managed by CNSX Markets Inc. It is said to aim at promoting micro-cap and emerging companies.
The Canadian Stock Exchange launched the CSE Composite Index, the first of its kind, in February 2015. It reportedly aims to give a glimpse of the market activity in the small-cap companies in the country. The index is said to contain about 75 per cent of the total listed securities on the stock exchange.
The CSE Composite Index, with roughly 420 constituents, includes securities with an average of C$ 129 million market cap.
The CSE platform too includes companies from various sectors, such as life sciences, mining, diversified industries, technology, oil and gas, and clean technology, among others.
The above constitutes a preliminary view and any interest in stocks should be evaluated further from investment point of view.