Building a Solid Investment Strategy
Before investing in penny stocks, understand the company's fundamentals, such as their balance sheet, market cap, and profit margin. Review their capacity to generate revenue and assess the viability of the company's products or services.
Investing in penny stocks requires a thorough understanding of the industry the company operates in. Look at the current trends, the major players, and any potential disruptions that might affect the company's performance.
Diversification is critical when investing in penny stocks. Spreading your investments across various sectors and companies can help minimize risk. Therefore, balance your portfolio with a mix of various stocks.
Penny stocks are not typically a quick win investment. While there are instances of rapid share price growth, these are more the exception than the rule. Successful penny- stock trading and investing requires patience and a long-term perspective.
Penny stocks, being high risk, should only constitute a small portion of a diversified portfolio. Be prepared for fluctuations in the stock market, and don't invest more asx penny stock than you're willing to lose.
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Understanding ASX Penny Stocks
Investing in penny stocks can be akin to venturing into a minefield, making it a highly speculative endeavour. These stocks belong predominantly to small companies, sometimes referred to as 'micro cap stocks', 'small caps', or 'smaller companies'.
They're often young companies with stock prices that are low. In mature markets like North America, the definition is below $1 per share. In Australia, there is a lack of consensus, although some use thresholds such as under $10m market capitalisation or only include stocks that are a tenth of the share. Either way, they are highly speculative investments in them an enticing proposition for those willing to take on higher risk for potential high returns. Many blue chip stocks could have fitted into the 'penny stock' definition several years back - BHP was under $1 just before the turn of the century!
One key attribute of penny stocks is their lower liquidity, meaning there are relatively fewer sellers and buyers. This can make these stocks thinly traded, and at times it can be difficult to find enough buyer demand if you decide to sell your shares. However, by conducting your own research, you can mitigate some of these risks and potentially uncover lucrative investment opportunities.
Key Considerations When Buying Penny Stocks
Just like buying shares in larger, established companies, doing your due diligence is crucial when investing in penny stocks. Studying the company's fundamentals, such as their balance sheet, profit margin, and the potential to generate revenue is key.
Additionally, understanding the nature of the company's products or services, as well as the market in which they operate can give you insight into larger companies and their near future prospects. Past performance, while not a guarantee of future results, can also offer valuable information.
The Risk of Investing in Penny Stocks
Penny stocks are known for their low market prices and the potential for rapid growth. While their low-cost nature makes them an attractive option for new investors, their inherent volatility also categorizes them as high risk investments.
While the prospect of turning a small investment into a fortune is certainly appealing, it's crucial to remember that penny stocks tend to be high risk investments. The companies behind most penny stocks are often going through financial difficulties or are yet to establish a consistent revenue stream. Therefore, as an investor, you must be prepared for the potential of a total loss.
Our Top 3 Penny ASX Stocks
Prescient Therapeutics (ASX: PTX)
Prescient Therapeutics (ASX:PTX) is working on the next generation of cancer therapies. The company owns OmiCAR, a technology enabling CAR-T therapies to be develop, and CellPryme which enhances adoptive cell therapy performance. Both of these enable more effective CAR-T therapy to be delivered and better outcomes for cancer patients as a consequence.
Prescient has two other drugs, including PTX-100 that is currently in a Phase 1 trial for T-Cell Lymphoma.
Coast Entertainment Group (ASX:CEH)
Coast Entertainment Holdings, formerly known as, Ardent Leisure, is an owner and operator of leisure assets including theme parks, tourist attractions, bowling centres and laser skimpish parks.
Key assets include the Dreamworld and Whitewater World theme parks and the Gold Coast SkyPoint tower. It had a difficult few years following the Dreamworld deaths in 2016, but finally settled the legal cases, recorded its first profit and exited its US businesses.
Myer (ASX: MYR)
Myer (ASX:MYR) is a consumer retailer with both a brick and mortar and online presence. Although its time on the ASX has been torrid, we believe it is entering a new phase of life as an omnichannel retailer, 'right sizing' its store network and focusing more on ecommerce. The company just recorded its highest annual sales in nearly 20 years, makes 20% of its sales online and made its highest profit in 8 years, $71.1m.
Frequently Asked Questions
There are numerous ASX penny stocks that have shown promise, such as Castle Minerals and Minrex Resources, among others. However, the "best" stocks will depend on your investment goals and risk tolerance.
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