How I’d invest £300 in penny shares today

For some buyers, the attract of a penny share is everlasting. Promoting for pennies implies that such shares can look low-cost.

Some penny shares go on to make enormous returns — doubling, tripling, quadrupling, and even higher. However many don’t. Quite a lot of find yourself changing into nugatory.

So, if I had a spare £300 and needed to purchase penny shares, right here is the method I’d take.

Attending to grips with worth not value

Simply because one thing sells for pennies (and even fractions of a penny) doesn’t essentially make it low-cost. The truth is, it may very well be very costly.

Why?

Worth is just not about what one thing prices, however what it’s price. Whether it is finally price zero, then paying even a few pence for it’s finally like burning cash.

Some penny shares look nugatory to me as quickly as I see them – for instance, they could don’t have any income, heavy losses, and no apparent future income or earnings.

In such a case, money on the stability sheet would possibly assist assist the share worth, but when the corporate continues to burn money, it could possibly find yourself nugatory.

Different conditions might be extra nuanced.

Think about potential turnaround conditions of once-successful firms which have encountered problem and commerce as penny shares. Lately there are a bunch of examples, comparable to Laura Ashley and Cineworld. Some buyers loaded up on the penny shares, within the hope of a enterprise turnaround that by no means materialised.

Being a very good investor

I believe the lesson there may be that what makes a very good penny share is what makes a very good share at any worth: paying considerably much less for a stake in a enterprise than it’s finally price.

Penny shares can typically include challenges which are much less widespread in a lot greater firms, although. For instance, a smaller market capitalisation can typically imply there aren’t any giant institutional shareholders with expensive stakes monitoring company governance as with most FTSE 100 firms.

How I’d make investments

Nonetheless, though my start line can be on the lookout for worth, not focusing simply on share worth, if I did need to spend a number of hundred kilos shopping for penny shares for my portfolio, I’d comply with the ideas of investing I set out above.

I all the time maintain my portfolio diversified and that’s true on the subject of penny shares too. If I needed to take a position solely £300, I’d cut up it throughout not less than two shares. Finally I’d concentrate on worth, not simply value.

Let me illustrate.

I personal penny share Topps Tiles (LSE: TPT). The shares promote for pennies and Topps’ market capitalisation is £88m.

However Topps is just not some loss-making minnow with no revenues.

The truth is, the decades-old retailer made document revenues of £263m final yr. Revenue after tax greater than halved however nonetheless got here in at £4m. The share at present has a dividend yield of 8% and appears low-cost to me, because it sells on a price-to-earnings ratio of 10.

Harder market circumstances are a threat to profitability. Gross sales within the remaining quarter of final yr confirmed a 4% year-on-year decline.

However with a widely known model, giant base of commerce prospects, economies of scale, and rising on-line presence, I believe Topps Tiles shares look attractively priced.