What is a micro cap or penny stock?
Before I go on to give an example of how I have managed to trade the 'occasional' micro cap, I want to first explain what I think a micro cap is.
Stockopedia have their own definitions of market capitalisation bands for UK Stocks here. I hold the view that the term 'micro cap' is arguably any stock with a market capitalisation under £15m. I tend to also think of a 'penny stock' as a stock with a share price below 50p although again arguably some sources define 'penny stocks' from 300p or below.
But whatever definition is used most penny stocks have the same characteristics. They are usually illiquid, speculative, high risk and listed on the LSE junior market the Alternative Investment Market (AIM). They list on AIM where regulation is lighter than the main market. Many of these stocks require fund raising, usually through the issue of more shares (rights issues which in turn dilute the share price).
The answer is simple. The thought of doubling, tripling (or more) your profits. A huge number of private investors love them. They can be exciting, fun and the most talked about stocks on bulletin boards. Terms Like 'multi bagger' and 'strong buy' are often used by posters to entice more private investors into buying this 'low risk' stock. The directors of the company sometimes put out positive spin on their trading statements. Things like 'Our future is bright. Sales and profits expect to increase exponentially over the years'. 'We expect our share price to double in the next few months.' All these factors drive many private investors into a momentum of false optimism You would be foolish not to buy in and miss out on these massive gains huh?
Unfortunately for most private investors the reality is somewhat different from the dream.
How risky is the most talked about penny stocks?As a subscriber to Stockopedia I have access to some pretty nifty and effective portfolio tools. One is the bubble chart. Based on the StockRanks system it can give a clear overview of how risky a basket of stocks in a portfolio can be. Is the majority of the stocks 'expensive, junk, lagging ' or are they 'Good, Cheap, and leading on momentum'.
I know the staff at Stockopedia had done an article…
