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Penny shares can
lack liquidity. They have wide spreads and the price
may move sharply on only a little trading.
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The Alternative
Investment Market is less regulated than the Main
Market, and has many companies with foreign assets.
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PLUS-quoted stocks
are small and unlisted. They are largely immune
from trends affecting mainstream markets.
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Unless you know
what you are doing, avoid the high-risk US OTC market.
-
Wait until a newish
shell company has announced a deal before you invest
in it.
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Recovery stocks
may become takeover targets. If you invest in these
early enough, you can sometimes make good money.
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Buy cyclical stocks
near the bottom of the cycle and favour survivors.
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Investors may feel
that penny stocks offer more for their money because
the share price is low. It is an illusion, but a
share split or scrip issue provides a psychological
boost that can lead to a price rise.
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Creative accounting
still goes on. Be wary if depreciation is too small
or an item normally expensed is capitalized on the
balance sheet.
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Look for leadership
and technical expertise in the management, but not
necessarily in the same person.
-
Avoid the dedicated
penny share dealers because they act as principals
and may not give you impartial advice.
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Never invest in
unquoted companies only for the tax perk.
