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Australia’s penny stocks
Penny stocks, or small caps as they're known in Australia, attract investors due to the cheaper price and higher upside compared to "blue chip" equities – but they come with more risks.
"Penny stocks" is a loose name for cheap, low-priced shares of small, often newly listed companies. There are a few different ways to define Australia's penny stocks.
Here are some of the characteristics of penny stocks, but it's important to highlight they might include all of these characteristics:
Small company
Market cap below $50 million
Newer company recently listed
Share price below $5, although some consider stocks under $1 as the mark for penny stocks
Limited financial track record
Young, micro-cap shares that are usually more volatile than large caps
Doesn't pay dividends
List of ASX penny stocks
Source: These are the 20 stocks in the iShares S&P/ASX Small Ordinaries ETF with the smallest market caps. This list includes some examples of Australian penny stocks and is not an exhaustive list, nor is it a recommendation for any of the stocks mentioned.
Pros and cons
Here are some of the benefits and risks of investing in small-cap Australian penny stocks:
Pros
Low prices. Because they're low-priced, investors can hold a diversified portfolio of penny stock companies without needing to spend as much as they typically would.
Growth opportunity. Small-cap, newly listed companies can often present great growth opportunities if you pick the right ones. However, it could be a bumpy ride to the top.
Thrilling. Penny stocks often see their share prices change significantly in little time, which can be exciting for investors with high risk tolerance.
Day trading. Because of their large price swings, penny stocks are often used by active day traders.
Cons
High risk. Penny stocks are very high-risk investments compared to other listed companies and ETFs with a longer financial track record. Not all companies that list on an exchange do well and a lot of penny stocks never become anything more than a penny stock.
Very volatile. Penny stocks often experience extreme share price highs and lows within a matter of days (or even within the same day).
No income. Penny stocks rarely pay any dividends, as all revenue is usually reinvested back into the company to help it grow.
How do they stack up to blue chips?
On the opposite side of the scale to Australian 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 an extensive, stable financial track record. Some of Australia's biggest and most well-known companies are considered blue chip stocks, such as the Big Four banks, Telstra, BHP.
While penny stocks in most cases pay no dividends, blue chips stocks almost always do.
The downside of buying blue chip stocks is they traditionally have a slower growth rate compared to smaller stocks.
If investors are chasing larger capital growth, they traditionally do not look at blue chip stocks.
Should you invest in penny stocks?
You could consider investing in Australian penny stocks if:
You have a high risk tolerance
You're an experienced investor
You're willing to cut your losses if the share price falls significantly
You have a long investment time frame and are willing to ride out the volatility
You're happy to take a bit of a "gamble"
Are penny stocks good for beginners?
Australian penny stocks can be a good way for investors to ease into the market.
Like with everything else in life, you get what you pay for. So investors who choose to put their money in mature blue chip stocks can do so, but it will cost them more for the privilege.
On the other side is penny stocks, which as the name suggests are significantly cheaper per share.
However, there is a downside – these companies are far riskier compared to the more established players.
Ask an expert: How do you pick the right stocks?
Jessica Amir Market strategist, Saxo Bank
Investing can be simple if you keep in mind that a business’s value is often estimated by its future earnings. For example, in the week the NSW/VIC border reopened, travel stocks rallied as investors betted that company earnings in the sector would lift. So, when picking a stock consider:
Is the company in a growth area?
Does it have a solid history of company growth and is the company likely to be around in 10–15 years?
Is it growing or likely to grow its revenue (and/or cash flow)? Remember that earnings growth drives share price growth.
Tips for investors
If you're keen to invest in Australian penny stocks, here are some tips to help you get started.
Do your research
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.
Plan a strategy and stick to it
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.
Don't make emotional decisions
It can be easy to get emotionally attached to an Australian 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.
Cheap doesn't always mean value for money
Penny stocks may appear to be cheap in comparison to other shares listed on the ASX, but don't base your investment decision purely on this.
A 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.
How to buy penny stocks in Australia
Choose a share trading platform. If you're a beginner, our table below can help you choose.
Open your account. You'll need your ID, bank details and tax file number (TFN).
Confirm your payment details. You'll need to fund your account with a bank transfer, debit card or credit card.
Find the shares you want to buy. Search the platform and buy your shares. It's that simple.
Compare share trading platforms to buy penny stocks
Important: The standard brokerage fee displayed is the trade cost for new customers to purchase $1,000 of either Australian or US shares. Where a platform charges different fees for both US and Australian shares we show the lower of the two. Where both CHESS sponsored and custodian shares are offered, we display the cheapest option.
Penny shares frequently asked questions
Even in a rate-rising environment, investing can still be worth it, especially if you find the right stocks. This certainly doesn't mean all penny stocks will rise – far from it – but if you can find the right share, it can still be worth investing.
Penny stocks can be a great way for investors to enter the stock market due to the cheaper entry point as well the large growth potential.
Due to the smaller market capitalisation, these businesses often come with additional risks. As such, some investors shy away from penny stocks.
You can invest in penny stocks on the ASX.
Yes. In fact, it's a higher risk, higher reward strategy. In some circumstances, investors can make strong returns from penny stocks.
Alison Banney is the money editorial manager at Finder. She covers all areas of personal finance, and her areas of expertise are superannuation, banking and saving. She has written about finance for 10 years, having previously worked at Westpac and written for several other major banks and super funds.
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