- Penny Stocks are cheap stocks that are attractive to some investors.
- Many companies that are big today started off as penny stocks, but most penny stocks fail.
- NZ’s A2Milk company started off as a penny stock company with its share trading at 20 cents once upon a time.
There are many stocks on the NZX that are really cheap. Look at Blis Technology (NZX:BLT), which sells probiotic strain across the globe and is expanding at a very rapid pace, is worth less than 5 cents. Promisia Healthcare (NZX:PHL), which is expanding rapidly into the healthcare space takes the cake at 0.1c. While a few are less than 1 cent, many are under 10 cents.
Investors who focus more on the Company’s value, or market capitalisation, rather than the price of the share believe in penny stocks. In fact, some of the growing companies fall in this space with their stocks priced at less than $1.
These shares have low price on them because the market probably didn’t believe in the Company’s future or potential and therefore these stocks were not worth investing.
But some investors believe in their potential to give good returns, especially the investors with a risk appetite. They buy stocks really cheap in large quantities and hope that if they improve even half a cent, they would make good money.
How often do penny stocks succeed?
There are some stocks that are profitable because of their growth prospects, and many of the large companies started off as penny stocks. If we were to look around the world and see, we would find that big tech companies such as Apple Inc and Microsoft also started off as penny stocks. It might be interesting to know that Microsoft was a penny stock in the early days of the internet in the 1990s. As Microsoft grew, its stock price also grew to over USD$200 per share. Few companies with penny stocks might grow but many also fail.
Many factors force them to delist from the stock exchange and these include: the burden of compliance and a lack of investor’s response due to their illiquidity.
From investors’ point of view, factors coming in the way of penny investing could be
- High-price volatility: Even a small movement might lead to huge gain or loss for a small pool of investors.
- Failing Company: The company might fail as penny stocks are associated many a times with companies that are on the verge of failing. Some small businesses never take off to become big businesses instead become sunset companies.
- Fraudulent schemes: There could also be fraudulent schemes associated with penny stocks, so an investor must keep an eye on those.
- Long-term investments: It is common knowledge that penny stocks are often high risk, but with high returns and many pitfalls. While penny stocks are good for day trading, they are also very long-term investment.
However, many companies did not give up and stuck to the stock market when they were expected to fade away. Some of these companies have grown and become multibillion companies. A2 milk company is a big example. According to New Zealand Shareholders Association (NZAS), effective governance along with future vision, was key to the performance of a company and its share price.
NZ’s most successful penny stock
A2 Milk company (NZX:ATM) with a NZ$11-billion market value started off as a small-priced company. It listed in 2005 with a share price of less than 20 cents. The company started innovating products, expanded its market to other countries and focused on governance.
Today, A2 Milk shares are trading at NZ$7 per share.
Most profitable penny stocks on the NZX
There are several stocks on the NZX that can be potential multibaggers due to their growth plans and other environmental factors:
Blis Technologies Limited (NZX:BLT)
Also read: Could These 6 NZX Penny Stocks Emerge As Multibaggers?
NZ Windfarms Limited (NZX:NWF)
Metro Performance Glass Limited (NZX:MPG)
Rakon Limited (NZX:RAK)
New Zealand Oil and Gas Limited (NZX:NZO)
Wellington Drive Technologies Limited (NZX:WDT)
Sky Network Television Limited (NZX:SKT; ASX:SKT)
Also Read: Why are these 6 NZX stocks creating a buzz today? TWR, AMP, KFL, BRM, MFT, SKC
Cannasouth Limited (NZX:CBD)
Cavalier Corporation Limited (NZX:CAV)
A word of Caution for investors to avoid pitfalls
Investors must follow a different route to invest in penny stocks. They must be educated first to avoid pitfalls. Some things they need to watch out for are:
Invest cautiously by taking all the risks involved into consideration. It’s very important to recognise that penny stocks are speculative. While diversifying your portfoilio, don’t keep it heavy with penny stocks. According to investment guides, they should comprise 10% of the portfolio.
The investors should also see the company’s fundamentals before investing.