Penny Shares

Penny shares. Let's face it; they're seductive little buggers aren't they? They scream at us: "Buy me! Buy me! Double your money in a week, maybe treble it, maybe you'll become a millionaire..." I've been seduced quite a few times over the last few years. Sometimes I made money and sometimes I lost a lot. I'm much more experienced now and I treat them with immense caution.

I don't see any problem with an otherwise decent and balanced portfolio containing one or two risky penny shares with a small amount for a bit of fun/entertainment. But there is a problem when would-be investors start out their investing by buying into penny shares in the hope of a quick buck. They read something on a bulletin board or hear something in the pub and merrily go ahead and "punt" on the share concerned without doing any research at all.

Here, for example, is an e-mail I've just had from a reader. I'm not going to name the company concerned just in case any of you get seduced:

"I'm looking to invest in some penny shares. Hence, I have heard loads about a particular company namely from some budding investors at work. Admittedly, I don't know much about them at all, but, looking at their share price over the last year, they seem to have struck bounce-back syndrome pretty quick and look to be rising in the near future. From the RNS releases they look to have a sound business model. Buy price at the moment is 3.10 pence a share."

This is the kind of mail that makes me worry about the writer. What he failed to mention was the current sell price of this company is 2.5p! That means if he buys the share, he is already down a massive 20 per cent. The sell price would have to rise 20 per cent just for him to break even.

His reason for buying? Someone told him at work. What's worse is he says: "I don't know much about them at all..."

The answer to that is for goodness sake, find out!! Use ADVFN and all its resources to read everything about a company before you buy it blindly.

Actually, he did mention a reason for buying: "They seem to have struck bounce-back syndrome".

Well, he's right. The shares have risen from 1p to 3p. But that's no reason to buy in itself. What he wants to do is buy the shares because it's exciting! And I bet nothing I say here will put him off.

Do you know the worst thing that could happen to this chap? He buys at 3p and the shares double! The next thing to happen after that? He'll end up getting cocky and only buy penny shares and, of course, the next buys will be a disaster. So what I'm saying is, by all means, enjoy the fun of penny shares and maybe stick 5 per cent of your overall funds into them but don't pretend to yourself that it's investing.

Remember, the spreads are wide, the market in them is often illiquid, and you could (and probably will) "do your brain". Invest wisely and don't let a rush of blood to the head make you press the buy button and buy a shed load of shares that may end up being worth nothing.

The recent sell off in small and medium company shares has thrown up a few bargains and I've been getting stuck in and buying companies I feel look like great value at now bargain prices, albeit using relatively tight stop losses in case the malaise continues. Those companies include Carrs Milling Industries and Dart Group.

I've also been buying/topping up in companies that have proved themselves strong during the recent sell off. These include Roxboro (bid possibilities here too), Kier, and Erinaceous.