Penny stocks have made the fortune of some investors. With returns that sometimes exceed 1,000% over three years. But this investment is not without danger. Far from it.
Investing in the stock market for just a few cents? This is possible, thanks to “penny stocks”, these securities valued at less than 1 or 2 euros. The shares of the Atari company are traded, for example, around €0.12. And those of CGG are worth today approximately €0.70.
A boon for investors? Not always. “Penny stocks are companies whose price tends towards zero”, explains Antoine Fraysse-Soulier, market analyst for the broker eToro. In other words, just because the price of these companies is low does not necessarily mean that it is a good deal.
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Dizzying returns
Still, some investors have pocketed stratospheric gains from penny stocks. In 2015, the share price of Avanquest stagnated at €0.90. The company then decided to change its name to become Claranova and to restructure. As a result, in three years its shares have soared 1,117% to reach €10.96 end of 2018.
Winnings that make you dizzy. But that come with a high risk. Because like cryptocurrencies, penny stocks are known for their high volatility. ” It’s logic. If the price of a stock that is worth 10 cents increases by 1 cent, this represents 10% increase”, observes Antoine Fraysse-Soulier.
However, the reverse is also true. Especially since all these titles are not equal. “Some companies choose to become penny stocks,” explains Antoine Fraysse-Soulier. For this, they multiply the stock splits (or “split”), a technique that involves increasing the number of shares outstanding to drive down prices.
The goal? Maintain their share prices at attractive levels and accessible for investors. “Apple has already used this method 5 times in the past. Because small shareholders necessarily have more difficulty investing in a stock $3,000 only in a title $5 », indicates Antoine Fraysse-Soulier.
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Financial difficulties
That said, for most penny stocks, the reality is quite different. “These are often companies ailingwhich suffer the fall in their price following financial difficulties, scandals or management errors”, notes Antoine Fraysse-Soulier.
The shares of Orpea, for example, were worth more than 100 euros in 2021. But today, that title has fallen to €2.30. “For these companies, which are often highly indebted or which suffer from a poor image, the risk of bankruptcy or delisting is considerable”, indicates Antoine Fraysse-Soulier.
Another pitfall: the liquidity of penny stocks is often low. As a result, it sometimes takes several days before an order is executed. “The danger, if there are few movements in the purchase or sale of a security, is not being able to part with it at the desired time”, warns Antoine Fraysse-Soulier.
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Choose your penny stocks
In this case, how to invest in penny stocks without risking losing everything? “Penny stocks are an attractive option for boosting a portfolio, provided you select these stocks carefully and don’t allocate more than 5 to 10% of your capital,” says Antoine Fraysse-Soulier.
It exists today 155 companies valued at less than 1 euro on the Paris Bourse. To find the future “nuggets” look at the company’s quarterly accounts to see if they are improving. If the company deleverages and finds positive ratios, it is also a good sign.
“Also look at whether the company’s price continues to fall, or if it has been stable for several months, which could indicate that the low point has been reached,” comments Antoine Fraysse-Soulier.
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