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Introduction to penny shares

Introduction to penny shares

Penny shares are equity holdings with low value issued by small companies. There is no official rule for when equity becomes penny shares, but equity tends to be considered penny share when its share price is less than 50 pence or its bid spread offer is about 10% of the offer price. Companies that have just started or those capped at under 100 £million often have a short operating history and small amount of net tangible assets, which makes their share price much lower.

Types of penny sharesPenny shares can be classified in different ways, which constitutes different types of shares. It is important that you are familiar with the common types of penny shares available to better appreciate how volatile a proposition and exciting a prospect the shares are.

New/young issue sharesThe majority of penny shares are issued by startup companies or young companies that have only operated for a short period of time and have only recently become public. Many of the large blue-chip companies that enjoy the stability of a large asset-base and long trading history started out in this category.This fact underscores the potential that investing in the right small and growing company can bring.Recovery sharesRecovery shares are issued by companies that were once performing very well but for one reason or the other their share price fell significantly. A business take-over, change in management or company restructuring, however, offers promise that the company may turn its fortunes around and return to its former glory days.

Cyclical sharesCyclical shares have prices that rise and fall according to prevalent economic climate and changes in business cycles. For instance, automobile and transport manufacturing industries tend to flourish when economies are growing and expanding and perform poorly when businesses growth experience down cycles. Investors are advised to buy these stocks during the bottom cycle before the upturn cycle when prices rise again.

Defensive sharesDefensive shares are the inverse of cyclical shares. Their prices tend to perform well in periods of economic downturn – sometimes even better than during normal trading cycles. Companies in this category deal with products or services that enjoy steady demand and for which consumers are unlikely to cut back on even in hard economic times – such products as food and utilities. The companies also have established reputations that consumers are comfortable to fall back on when it becomes risky to invest in less steady industries.

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