What are Penny Stocks?
These days the definition for penny stocks is for any stock that trades under $5.00 per share. ASX investors looking to buy ASX Penny Stocks require very cheap stocks that subsequently run up and become highly lucrative holdings. ASX Penny Stocks are the tiny ASX listed Small Caps that you can buy for a very small amount. They cost used to cost ‘a penny’, but now of course, it’s cents.
What is the difference between Penny Stocks and Small Cap Stocks?
Penny stocks can also be called micro-cap stocks or small cap stocks. There are lots of ASX micro-cap or small cap stocks that are ‘penny stocks’ because they literally cost a few cents and are certainly well under a $5 a share. The definition of penny stocks is only about how much each share costs, but it is not considering the size or value of the entire company, and this is where risk really comes into it.
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Penny Stocks offer huge share price growth
Penny stocks are interesting and often very exciting investments. Penny Stocks have leverage, which means they can achieve much faster growth. These ASX Stocks have the ability to grow sales but penny stocks also have the ability to grow earnings even more. We’re talking about operating leverage.
Penny stocks are small companies and offer huge growth potential. If a company generates sales of $100m and it grows sales at 10% to $110m, that is a big deal and it might grow its profit after tax by that amount. But if a much smaller company has only $10m in sales and increases its sale to $12m, that is an increase of 20%, from which its net profit after tax might grow 40%. For Penny Stocks, because their costs are lower, when they grow sales, the bottom line grows even more which means the profitability grows exponentially and the share price of the penny stock grows exponentially too!
Are all Penny Stocks a risky investment?
Penny Stocks have a bad reputation as being highly risky stocks to buy. You always hear about people who bought in and lost all their money, but you also always hear about the people who made a lot of money from buying penny stocks!
Most ASX stock investors don’t want to put their money, whether it’s a few cents or a few hundred dollars or in fact any money into the dust bin. Money is hard to earn and they respect it!
Market Capitalisation and why the size of a company is important to ASX Stock investors
Before you invest in a penny stock simply because it doesn’t cost much, you really need to actually look at the company to see if it is profitable, or at least is on the path to being profitable. (of course there are always exceptions, like Amazon for example that doesn’t actually make much money, yet is worth a lot!). But profitability is important and remember the hideous statistic from the Australian Bureau of Statistics that more than 60% of businesses fail within their first three years.
What does Market Capitalisation mean?
Market Capitalisation or market cap simply means the value of all the shares on issue which tallies up to how much the company is actually worth in total, not including the debt it might own. When you buy an ASX share you are buying part of the company. The market cap also gives ASX stock investors a guide to liquidity which means how easy it is to buy and sell out of the stock. Because even if you own the share and decide you want to sell it, there has to be someone there wanting to buy it, and with very small ‘penny stocks’ liquidity can be a real problem.
ASX Penny Stocks with a Market Cap of $50 million
At Under the Radar Report we focus on the ‘sweet spot’ of ASX stocks with a market cap from around $50 million to about $500 million. In this space there are still lots of ASX penny stocks with a stock price of well under $1 (over 50% of the ASX small cap stocks we recommend fall into this category) and the other 50% are under $5. Only occasionally do we recommend an ASX stock with a price tag of over $5 per share.
How to find ‘penny stocks’ to buy that are also profitable businesses
Any ASX stock has risks but at Under the Radar Report our purpose is to find cheap, undervalued stocks that our independent analysts believe are a strong and profitable investment. We look at every company’s fundamentals, which means their financial and operational strengths. We only recommend ASX penny stocks that are profitable companies that show true potential. Penny Stocks in a balanced ASX share portfolio have the ability to transform your returns.
60% Returns on our ASX Penny Stocks
We are very proud of our strong ASX penny stock picking record, where we have delivered an average return of over 60% on our buy recommendations over nearly 10 years. A major reason for this is our determination to investigate each of our ASX small cap companies thoroughly and to analyse what the share price is reflecting and how that relates to fundamental value.
How to find the Best Penny Stocks to buy on the ASX
Our team of expert stock analysts hunt for ASX penny stocks that have substantial long-term potential for ASX stock investors. We have a strong team of independent analysts who are all expert company analysts and are experienced and highly knowledgeable about penny stocks and small caps and what to look for.
Diversification and Buying Penny Stocks
We recommend that our ASX stock investors diversify their portfolio and invest over 7-10 ASX stocks which goes along with ‘don’t put all your eggs in one basket’. It’s common sense really but experts write pages and pages about it. But diversification is really important.
Find out what you need to get started with penny stocks