The term penny stocks is more commonly used overseas in the US, UK or Europe, but you could have also heard the phrase in Canada too. So what are they?
Penny stocks, also called micro-cap stocks, are usually cheap, low-priced shares of small, often newly listed companies. There are a few different ways to define Canada’s penny stocks. Some definitions say it’s listed companies with a market cap $50 million and $300 million. A value of less than $50 million can be referred to as a nano-cap stock. Another definition is stocks with a share price of less than $5.
Investors are often attracted to penny stocks for their cheap prices and potential growth opportunities, though there are risks involved with penny stocks, too.
Some of the typical characteristics of a penny stock include:
Here are some of the benefits and risks of investing in Canadian penny stocks:
On the opposite side of the scale to penny stocks are blue chip stocks. In comparison to penny stocks, blue chip stocks are large listed companies that have been around for a long time and have a long, stable financial track record. Some of Canada’s biggest and most well-known companies are considered blue chip stocks, such as the Big 5 banks, mining companies, retail giants and energy and utilities companies.
While penny stocks in most cases pay no dividends, blue chips stocks almost always do.
You could consider investing in penny stocks if:
If you want to invest in Canadian penny stocks, here are some tips to help you get started:
This is important for all investments, but particularly higher-risk investments like penny stocks. Blue chip stocks are, by their nature, lower-risk options as they’ve got a long history of strong financial performance.
Before you start buying, decide which penny stocks you’re going to invest in and how much you’re going to invest in each one. It’s also important to decide what price you’d sell at if the shares were to fall and stick to it to avoid the “I’ll just hold a little longer and see if the price jumps back up” mentality. The same applies for gains.
It can be easy to get emotionally attached to a penny stock, as they’re often the underdogs in your portfolio. So when their share price falls and falls some more, you can find yourself making excuses as to why you should keep holding. This is why it’s important to make a strategy, so you leave the emotions out of it.
Penny stocks may appear to be cheap in comparison to other shares listed on the TSX, but don’t base your investment decision purely on this. One factor that influences a company’s share price is the demand for its shares. The less demand from investors, the lower the share price. So some penny stocks may appear to be cheap, but you need to ask yourself why this is.
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