Penny stocks are essentially ‘small cap’ companies having the market capitalisation of less than £500 million. Small caps mean businesses with lesser market capitalisation. The market capitalisation is a variable metric; it is a function of number of outstanding shares and current market price.
Penny stocks could be a misleading term as it does not relates to whether the share price is in pennies/pence. Some investors and traders consider businesses with market capitalisation of less than £100 million as penny stocks.
Penny stocks are quite popular among traders and often make a lot of headlines. This is because they are exciting in terms of growth. The companies are new businesses, mostly focused on new ideas and innovations. People sometimes treat trading as a form of entertainment or hobby. However, the price returns not always match the investors’ expectations.
Investing in penny stocks has never been easy. The issue with investing in penny stocks is that a lot of businesses tend to collapse in the long run. There are several pitfalls which the investors need to avoid while investing in these stocks.
In the UK, the penny stocks are constituent of the AIM market. In the AIM market, the businesses are relatively new, typically consisting of miners, pharmaceuticals, or innovative technology companies. These businesses have lesser liquidity and a sudden change in the realm of sector can trigger a collapse for the business or might change it fortunes overnight. A lot of times, businesses have failed due to sudden changes in socio-political factors as well.
The development, marketing and use of products are often subjected to stringent regulatory policies which are time-consuming. Moreover, failure to meet the quality standards and compliance with regulatory policies often lead to incremental costs and even recall or suspension of products. Furthermore, the Growth of business is dependent on low cost fundraising which is difficult amid the weak internal cash generation.
The secret to play penny stocks is to identify and invest in businesses which have an edge over the competition which can disrupt the market or a specific expertise in the sector. For our discussion we have chosen some businesses, which have shown the DNA to survive in the current scenario with strong prospects of future growth.
- E-Therapeutics Plc (LON: ETX)
UK-based Pharmaceuticals & Biotechnology company, E-Therapeutics Plc is known for its algorithm based platform which aids in drug discovery. The company is likely to use this platform in the present scenario. ETX shares closed at GBX 3.10 on 31st December 2019. The company’s shares closed at GBX 18.00 on 5th June 2020. On a Year to Date (YTD) basis, the stock delivered a price return of 480.65 per cent. The company’s share prices have soared rapidly, and the market capitalisation has gone up manifolds in the last one year.
On 5th June 2020, after the market close, E-Therapeutics Plc’s shares were up by 13.39 per cent against its previous day closing price; closed at GBX 18.00. The volume stood at 12,322,521, which implies enough liquidity.
The stock's 52 weeks High and Low was GBX 21.75 /GBX 1.50. The beta of the company was negative, indicating inverse movement in comparison to the benchmark index. E-Therapeutics Plc’s market capitalisation stood at £51.19 million.
- Omega Diagnostics Group Plc (LON: ODX)
Omega Diagnostics Group Plc facilitates testing in the realm of contagious diseases, allergies, and food intolerance. Testing is of key importance in the prevalent conditions. Therefore, the company seems to have an edge over the competition. ODX shares closed at GBX 14.40 on 31st December 2019. The company’s shares closed at GBX 65.00 on 5th June 2020. On a Year to Date (YTD) basis, the stock delivered a price return of 351.39 per cent. The company’s share prices have soared rapidly, and the market capitalisation has gone up manifolds in the last one year.
On 5th June 2020, after the market close, Omega Diagnostics Group Plc’s shares were up by 3.59 per cent against its previous day closing price; closed at GBX 65.00. The volume stood at 4,678,444, which implies enough liquidity.
The stock's 52 weeks High and Low was GBX 73.50 /GBX 6.75. The beta of the company was 5.16, indicating very high volatility in comparison to the benchmark index. Omega Diagnostics Group Plc’s market capitalisation stood at £94.52 million.
- Indivior Plc (LON: INDV)
UK-based Pharmaceuticals & Biotechnology company, Indivior Plc facilitates drug development to cure for disorders caused by alcohol and opioid. This is a niche segment and the company is likely to tap a lot of market share. The company was initially carved out from Reckitt Benckiser Group.
INDV shares closed at GBX 39.00 on 31st December 2019. The company’s shares closed at GBX 62.00 on 5th June 2020. On a Year to Date (YTD) basis, the stock delivered a price return of 56.96 per cent. The company’s share prices have soared rapidly, and the market capitalisation has gone up manifolds in the last one year.
On 5th June 2020, after the market close, Indivior Plc’s shares were up by 4.38 per cent against its previous day closing price; closed at GBX 62.00. The volume stood at 1,593,017, which implies enough liquidity.
The stock's 52 weeks High and Low was GBX 65.42 /GBX 34.00. The beta of the company was 0.26, indicating lesser volatility in comparison to the benchmark index. Indivior Plc’s market capitalisation stood at £435.07 million.
These stocks have seen monumental surge in their market capitalisations. These businesses have strong trading volumes, which means a lot of traders and investors are in the hunt. While most of the businesses have been devastated by the outbreak of the novel coronavirus, these businesses have generated terrific price returns since the beginning of this year.
Penny stocks can yield exponential returns in the long run only if an investor looks from the point of owning the business rather than just owning a stock.
Disclaimer
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