Tips to Buy Penny Stocks for Investors In UK

Summary

• Penny stocks, though risky, present a good opportunity for investors to make windfall gains, should those start climbing because of a sudden turn of fortune.
• Some investors see value in penny stocks in the longer term and are willing to take a very high risk
• During a market downturn, several goods stocks are also available very cheap, which an investor can avail to build himself a good portfolio

Penny stocks are usually of the companies having a very small market cap and belong to business which is not doing well, either because they have had a series of unfortunate financial periods, or some unfortunate incident might have hit their business so that they are not able to perform as expected by their investors. This usually lands them in a territory no company wishes itself to see in, which in terms of investor evaluation translates into a no venture territory or get out of it as soon as possible. However, some investors see value in these stocks as well, in the longer term and are willing to take a very high risk in such stocks, making them potentially highly rewarding investment avenue.

Things to look out for to identify a potentially investable penny stock

1. A company about to make a turn on its financials previously marred by debt servicing – In this case when a company has had a bad financial history which has been led by a large debt sitting on its book, yet has a strong underlying business, it is a strong turnover candidate. These companies generally do two things, either take in a strategic investor, who buys out all the debt for an equity stake, or they go public and sell shares to retire debts. Now either of the two restructuring exercises could involve a lot of things, it may involve debtors converting their debt to equity, a company selling part of its unnecessary assets, or may be getting out of a loss-making vertical to get out of the precarious situation that it is in. A company entering into a restructuring phase thus represents a significant opportunity for value creation, an investor with a reasonable amount and time to spare along with some reasonable efforts to put in some research will be able to see if such a restructuring exercise would be able to turn the fortunes of a company and if it is now an investment case.
2. Unfortunate Incidents temporarily hurting the company’s fortunes – In this case, a company’s fortunes could have turned for the worse when some major accident or some other incident like a regulatory fine or a legal claim has been imposed on the company. In such a scenario, the company in order to restore its full-scale operations or pay off the unforeseen liability may have been forced to raise substantial debt which would put the long-term profitability of the company at risk. In this case, also the resilience of the company’s core business is the one thing to look out for. The scenario does represent an excellent investment case if the company’s operations were profitable as they were before the incident it, and it is a matter of time only and a possible restructuring to bring back the company to its old form. This, however, still requires a study of the intricacies of the company to arrive at an apt judgement
3. Macroeconomic event keeping the fortunes of the entire industry down – Sometimes large economic events like natural disasters, War and Economic sanctions can also push down the fortunes of an entire economy, or a particular industry. Under such circumstances, the companies operating in that industry would go through a long spell of a business downturn. The fortunes on these companies usually turn when there is a general economic recovery of the country hit by that unfortunate incident. An investor in this case, however, has to be careful about two things; first, he should be able to read the macroeconomic situation minutely so that his assumptions do not go wrong when he decides to put his money in a company or in an industry. Secondly, he should double-check the financial situation of a company, as to whether it still is in a position to scale back its business up when conditions are right or its financial condition has deteriorated enough during the downturn period to not to be able to stand back up again.

General risks of investing in penny stocks that one should always be mindful of

There are certain rules that every investor need to follow, other than the general investing rules before they decide to invest in penny stocks. First and foremost the general precaution of not to invest on heresy, it bears special significance in this case as there could be many in the market who would be looking to dispose of their holdings and would be looking for naive investors to fall prey. Second, one should not invest a significant portion of his portfolio on these stocks, these stocks can bring windfall gains, but in the same way, can also completely wipe out the investment in no time. By investing a small amount, the investor may gain significantly if the stock rises but does not lose much should the stock fails. Third- one should not make an investment in more than two to three stocks of this kind as the rules of diversification does not work well with such high-risk type of stocks; instead one should make an investment in these stocks as part of their general portfolio containing large-cap and midcap stocks. Fourth- there is no point averaging out one’s investment in these stocks as a downslide is more likely to mean that the stock is going, and one could be digging a bigger hole for oneself by undertaking such an endeavour. Fifth- Such investments accentuate that a constant vigil be maintained by the investors. The high-risk nature of these stocks require that every event concerning these stocks be given attention to and should an investor at any point of time feel that situation could only deteriorate further for the company, he should exit the investment.