Penny stocks can often generate substantial returns rapidly, which, to some investors, is the perfect vehicle for instant gratification.
These extremely low-priced company shares hold a reputation as a hotbed for speculators but this doesn’t mean that all penny stocks are shoddy investments bereft of long-term value. There are some hidden gems among the many not-so-stable businesses; companies that have the potential to become valuable in the future but are presently overlooked by the market.
In this guide, we look at some of the most promising penny stocks.
Where Can I Trade Penny Stocks?
To trade penny stocks, you need a stockbroker that lets you trade low-priced small-cap stocks, and not all brokers let you. You also want the broker to be regulated and ideally allow you to trade with low (or no) commissions. To simplify your search, we have found some of the best brokers.
What Are Penny Stocks?
Penny stocks are shares of companies trading in the market for less than $1, but the label is sometimes also applied to stocks priced below $5. Put simply, penny stocks are very low-priced stocks.
Although penny stocks are attractive to speculators, that’s not the sole reason they’re risky. The perceived riskiness is more to do with low transparency and a lack of liquidity. Many penny stocks are traded over the counter (OTC) instead of on major stock exchanges, which is because of specific listing requirements to be included on the major exchanges.
Despite the less-than-perfect reputation, it is possible to find “penny stock” companies that have solid fundamentals and could go on to put in stellar long-term performances.
How to Trade and Invest in Penny Shares?
Open a Trading Account
Not all brokers let you trade low-priced stocks that have low liquidity, so you need to open an account with a broker that does let you trade small cap stocks. Once you’ve found such a broker, you can typically open an account within minutes by entering your personal information into an online application form and uploading any required identification documentation.
The broker’s trading platform will list the stocks that are available for you to buy, and you should be able to filter or search the list for the ones you’re interested in. Use our list of suggested stocks as a guide but be sure to do your own research. You should be able to click each listed stock to see additional information, including a price chart.
Place Your Trade
After selecting a stock, fill out the trading ticket with the number of shares you wish to buy or the amount you wish to invest, then press the “buy” button. Beware the bid-ask spread (i.e., the difference between the buying and selling prices) that may be especially wide for a penny stock. It means you’ll lose some of your investment immediately because you can’t resell the shares for the price you paid.
Top 10 Penny Shares to Trade
Here is a top-ten list of penny stocks to watch and trade in 2021:
- Xiaomi Corporation
- Sundial Growers
- Mizuho Financial Group
- Banco Santander
- MediPharm Labs
- Gem Diamonds
1. Xiaomi Corporation (HKSE: 1810)
Xiaomi is a Chinese electronics company that also operates in other business segments such as hardware, software, and internet services. It is perhaps best known for its smartphones and fitness bands.
Xiaomi shares were in an uptrend between November 2019 and January 2021 before falling back a little in the months to June 2021.
2. Sundial Growers (NASDAQ: SNDL)
Sundial Growers is a Canadian cannabis producer and supplier. Its products are sold under the Top Leaf, Sundial Cannabis, Palmetto, and Grasslands brands.
Sundial Growers was listed on the Nasdaq in 2019 but has since seen its share fall from the $13 IPO price to just under a dollar in June 2021. The attraction of this stock is that it could see stellar growth if marijuana is legalised at the federal level in the USA.
3. Transocean (NYSE: RIG)
Transocean is a Steinhausen, Switzerland-based company that provides offshore contract drilling services for oil and gas wells. It serves integrated oil companies, government-owned or government-controlled oil companies, and other independent oil companies worldwide.
This company’s shares have traded on the New York Stock Exchange as high as $170-per-share (in October 2007) and as low as $0.70-per-share (in October 2021). If this company ever recovers its former glory, it will make today’s investors a multi-bagging fortune of perhaps 40x.
4. Nokia (NYSE: NOK)
Nokia used to be big in mobile phones (in the 1990s) but has since fallen from grace. At about $5 in June 2021, Nokia’s shares are worth about one-tenth of the value they were in March 2000. It’s not all bad news because this once-dominant phone maker has pivoted to become a player in the fast-growing 5G industry. Nokia has secured contracts to build 5G networks in Belgium and Taiwan and may well benefit from the reluctance of many major countries to install Huawei 5G hardware.
5. Mizuho Financial Group (NYSE: MFG)
Mizuho Financial Group is a Japanese banking holding company that is involved with banking, trust, securities, and other financial services businesses. Mizuho holds assets worth more than $1.8 trillion through its control of Mizuho Bank and subsidiaries.
Unusually for many penny stocks, Mizuho pays a dividend and its forward dividend yield (as of June 2021) is 4.57%. Although the share price is sitting at less than a tenth of what it was in 2007, it appears to have consolidated over several years such that investors could see much more upside than downside potential.
Expert Tip on Investing In Penny Shares“ Some penny shares can trade at a low price for several years before taking off in the way that Apple shares took off after 2006 and Tesla shares took off after 2019. Most penny shares won’t do this, so the trick is to find the ones with hidden value that is yet to be realised. ”- Ron Mendoza
Why Invest In Penny Shares?
For every penny stock success story, there will be many failures, which is why diversification is even more important with penny stocks than it is when investing in blue-chip companies. Investors hope that for every ten failures, a single penny stock will rise more than tenfold in value.
Frequently Asked Questions
No. Some brokers — especially ones that let you place leveraged bets such as CFDs — only list highly liquid companies for trading. This was especially the case when so-called “meme” stocks such as GameStop and AMC Entertainment were subject to much speculation in January 2021.
The problem with penny stocks is that the wide bid-ask spread makes it impractical to set a stop-loss order close enough to come out of the trade for only a small loss. For penny stocks, diversification may therefore be a better risk management technique.
Penny stocks are sometimes suggested to beginners to take advantage of their naivety, but such stocks are risky unless you do good research and diversify across many such stocks.
Most if not all stocks are traded on stock exchanges during set hours, typically 8 am to 4.30 pm for the London Stock Exchange and similar (local) times for the New York Stock Exchange and Nasdaq.
In most jurisdictions, you will have to pay some form of capital gains tax or income tax on profits from trading stocks unless your profits fall below an annual allowance or you use a tax-efficient account such as a stock & shares ISA or self-invested personal pension (SIPP) in the UK.
The best online brokers are regulated by various financial regulators in different countries, but some are not. If you’re unsure about a broker, you should be able to search the list provided by the relevant regulator such as the Financial Conduct Authority (FCA) in the UK.