Forget penny stocks. Here’s how I’d invest £100

I prefer investing in solid shares with a good track record rather than apparent bargains that could mean you losing everything.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

The lure of penny stocks is hard to resist when you’re starting out as an investor. Today, I’m going to look at why newbies should consider bypassing the junior market completely.

What’s the pull?

It’s not hard to come across stories of investors making millions on company shares that were once trading for a few pence. This is, after all, exactly what happened to fast-fashion play ASOS. Trading at 4p a pop back in 2003, the very same shares now change hands for almost 3,200p. They were once above 7,000p!

The fact that stocks also trade at so low a price is often interpreted by new investors as a good thing since it allows you to buy what appears to be a huge initial position. A stock trading at 1p per share, for example, will give you a holding of 10,000 shares if you were to invest £100. Of course, this is irrelevant. It doesn’t matter if you have 10 shares or 10,000 if their value sinks to zero.

But there are other reasons to steer clear.

Reality check

The first is based on probability. For every ASOS, there will be thousands of businesses that merely tread water or fail completely (taking your money in the process). Winners spring to mind so easily due to survivorship bias.

To use an analogy, many will know that Usain Bolt holds the record for the 100m sprint. Few, however, will remember the names of those he beat to set that time (9.58 seconds), those who tried but failed to qualify, or know those who called time on their promising running career due to injury.

Second, many small companies see a stock market listing as a way of generating cash to make their blue-sky plans a reality. Unfortunately, just getting a business to profitability can take longer than expected, if it happens at all. This requires management to ask for more money to keep the lights on. More shares are then issued which, in turn, dilutes the value of those already held.

Third, penny stocks tend to be illiquid (hard to sell quickly) and, consequently, volatile in price. That’s less of an issue when markets are behaving themselves, but it can be an unmitigated disaster when they’re not.

A rush to jettison a minnow by investors is likely to result in a huge drop in price that doesn’t reflect its intrinsic value. If you’re actually able to sell, you may get back a lot less cash than you put in.

A better plan

Rather than diving in at the deep end of, I think all new investors should keep things as simple as possible.

By far the best way of doing this, at least in my opinion, is to invest in cheap funds that track the market return. You won’t get wealthy in a hurry, but you won’t lose your shirt either.

As an example, £100 stuffed in a fund tracking the FTSE 100 delivering a 7% annual return over 30 years would grow to £761 (excluding fees). Now think about if you were able to invest significantly more than £100 over that period of time. 

Bottom line

Investing in penny stocks can be a lucrative endeavour, but anyone contemplating entering this arena should be absolutely sure they understand the risks before doing so. If in doubt, steer clear.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Black father and two young daughters dancing at home
Investing Articles

1 FTSE 250 stock I own, and 1 I’d love to buy

Our writer explains why she’s eyeing up this FTSE 250 growth phenomenon, and may buy more shares in this property…

Read more »

View of Tower Bridge in Autumn
Investing Articles

The FTSE 100 is closing in on 8,000 points! Here’s what I’m buying before it’s too late!

As the FTSE 100 keeps gaining momentum, this Fool is on the lookout for bargains. Here's one stock he'd willingly…

Read more »

Investing Articles

3 ideas to help investors aim for a million-pound Stocks & Shares ISA

The UK has a growing number of Stocks and Shares ISA millionaires, and this plan may be one of the…

Read more »

Illustration of flames over a black background
Investing Articles

2 red-hot UK growth stocks to consider buying in April

These two growth stocks are performing well, but can they continue to deliver for investors through 2024 and beyond?

Read more »

Charticle

Is JD Sports Fashion one of the FTSE 100’s best value stocks? Here’s what the charts say!

The JD Sports Fashion share price remains a wild ride during the first quarter. Could it be one of the…

Read more »

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »