Do These Explosive Growth Shares Deserve A Place In Your Portfolio?

Written by Julie Brownlee on February 19th, 2016

Do These Explosive Growth Shares Deserve A Place In Your Portfolio?

Have you ever wondered what makes you invest on the stock market?

Chances are you want to grow your wealth over the years.

So which shares should you invest in?

The stock market heavyweights may attract your cash with the prospect of dividends and long-term growth…

But when it comes to the smaller companies, do you even consider them?

Many of these have great futures ahead of them and have the potential to become the giants of the stock market future!

So, do smaller companies, namely penny shares, deserve a place in your portfolio?


What Makes A Share A Penny Share?


Penny shares are the smallest shares on the stock market.

The general consensus by South African market commentators is penny shares trade for R2 or less.

Just like other shares on the stock market, penny shares cover all sectors of the stock market.

For instance, they could be firms specialising in technology, mining or finance.

Due to the smaller size of these companies, they can be far more niche and specialised.

This means they could be ripe takeover targets for larger firms if they perform well!

Some penny shares are new companies that have listed on the stock market, and the driving force behind these companies listing is the access to capital it brings.

Other penny shares are companies that are longer in the tooth but have fallen on hard times.

And the company’s share price reflects this.

So, should you consider investing in penny shares?

Or are you better off ignoring these stocks?


The Lure Of Penny Share Profits


The most common reason why investors put their money to work in penny shares is the profit potential!

It’s the chance to bag a substantial gain from buying shares for mere cents, only to see them soar to hundreds of rands in a few short years.

Simply put, penny shares have unmatched explosive growth potential!

 Just remember, the largest companies on the stock market all started out as small companies at one stage.

And by investing in promising looking companies at an early stage, you have the chance to strike it big.

Of course, if finding winning penny shares was an easy thing to do, many investors would have made fortunes from them.

But this isn’t the case.

With the smallest shares on the JSE, finding the winners isn’t easy.

And there are other issues you need to contend with when investing in these stock market babies.

Penny Share Problem #1: Liquidity

These companies don’t trade as often as their larger counterparts on the stock market.

For you, this means you may struggle to offload your holdings as there are simply no buyers.

Illiquid shares also tend to have a wider bid offer spread.

The bid offer spread is the difference between the buying and selling price of a share.

Larger companies tend to have tight bid offer spreads in comparison to smaller firms.

A wider bid offer spread eats into your potential gains, or adds to your losses in the case of a poorly performing share.

Penny Share Problem #2: Risk

The risks are higher investing in penny shares than in larger companies.

A smaller company can be much more vulnerable than its more cash rich, larger peers.

And they may find it harder to ride out tougher economic times.

A more modest firm may be reliant on just one or two big customers for its income.

If it loses these customers, the outlook for its business is bleak.


Where To Uncover Penny Stocks On The JSE


If you’re tempted with the profit potential of penny shares, there are three main areas you can find them…

1. Small-Cap Index

This index contains 60 companies.

These companies aren’t big enough to make it into the Mid-Cap Index (which also consists of 60 companies) or the Top 40 (which as it says on the tin, consists of 40 companies).

You may find a few penny shares lurking here.

2. Fledgling Index

This index houses companies which are too small to feature in the Small-Cap Index.

You should find a number of potential penny share investments here.

3. The AltX

The AltX is the alternative exchange to the JSE’s Main Board.

The JSE launched the AltX back in 2003 to make it easier for businesses to list on the stock market.

The listing requirements are slightly less demanding that listing on the Main Board.

The AltX attracts the likes of new businesses, family businesses and mining companies.

And this is where you’ll find several penny shares.


Are Penny Shares For You?


If you’re serious about investing in penny shares, the first thing you need to understand and respect is the risks that come with them.

Investing in these stock market tiny-caps isn’t for the risk averse.

Chances are you’ll only hit it big with one or two of several penny shares investments you make.

But if the risks don’t put you off and you think the gamble is worth it, penny shares can be a great place to put some of your investment capital to work.

But you need to do your research!

Investing in penny shares can be a very profitable endeavour, but there’s also a very real risk of losing money.

Thorough research is essential when weighing up these small companies.

But this isn’t always easy.

Due to their size, you may find it harder to find out a lot about them.

And this is certainly the case if they’re new additions to the stock market.

By only risking a small portion of your cash into penny shares, you know how much you could potentially lose if your picks don’t work out.

You shouldn’t approach investing in penny shares blindly.

Do your research, understand the risks and manage them, and you never know, you could become a lot richer a few years down the line!




How To Invest In Penny Shares


If you decide you want to invest in these stock market minnows, ensure you only put a small portion of your investment pot into them.

For example, only risk 10% of your investment capital into these shares.

Keeping a chunk of your capital in a diversified portfolio is the more prudent way to go.

By only risking a small percentage of your money in penny shares, you minimise how much you may lose from investing yet still benefit if you hit it big with one or two of your selections.

As with all investments, you shouldn’t risk money you’re not prepared to lose and this couldn’t be truer than with penny shares.

Buying penny shares is the same process as buying other shares on the JSE.

You’ll need the services of a stockbroker.

Some brokers may not offer all penny shares listed on the JSE, so if you plan to invest in these shares, check with your broker first.

Avoid investing tiny amounts into penny shares.

Don’t forget, the lower the amount you invest, the higher the impact of stockbroker commissions and fees.

Until then, here’s to profitable investing

Julie Brownlee | The Money Lab

Julie Brownlee
Editorial Contributor
The Money Lab