‘Penny stocks’ as a phrase can often turn some investors off. They have visions of scams and unstable companies from stories in the past. Although there are some penny stocks that I’d stay away from, there are some reputable companies that have a share price below £1 and therefore technically fit the bill. So if I’m looking to put £2k to work in the market right now, here are some points that I’d consider.
Focusing on mid-cap penny stocks
Firstly, in terms of where I’d invest in penny stocks, I’d concentrate on the FTSE 250. I feel this gives me sufficient confidence that the companies are reputable and large enough to avoid major pitfalls. For example, I think there will be enough liquidity in the trading of shares to allow me to buy and sell easily if I needed to. With some very small firms, this isn’t always the case and can mean that I couldn’t readily sell if I had to.
In the FTSE 250, there are several companies worth considering that have a share price below 100p. One that I like at the moment is Currys (LSE: CURY). The share price is down 37% over the past year, dragging the price to 91p at the moment. In the latest annual report, it cited risks such as supply chain disruption and uneven customer demand.
I accept this as a risk, but feel the company is in the right sector to benefit going forward. Tech is a growing space, especially with virtual reality and the metaverse. It also should be able to take advantage of a post-pandemic boom, with consumers more confident in spending more on hardware than this time last year.
Diversifying my £2k
When it comes to how I’d invest my £2k in penny stocks, I’d ensure I pick a range of companies. Even though I like Currys, I don’t think it would be wise to put all of my money there. It’s a high risk stock, so to reduce this I’m better off allocating just a proportion of my money there instead.
With £2k, I’d split it up between five different penny stocks, each with £400. This is a large enough amount to be able to benefit from a move. However, it doesn’t water down my exposure to the extent that owning 20 companies with £100 in each would do.
I also wouldn’t be in a rush to buy everything today. Sure, I’d buy some penny stocks right now. But others I’d prefer to keep an eye on in coming weeks. Further, stocks are sensitive at the moment to developments in Ukraine and Russia. So I don’t want invest everything now, only for the market to correct lower in coming weeks due to some negative headlines.
By dipping my toe in, I can keep some money aside and then deploy it if the volatility at the moment presents an opportunity.
