by Glenn Fisher
Posted 30th October 2015
As you may remember, I’m currently working on a big project building a case for why I believe penny shares are an excellent investment.
Indeed, I’m bunkered up here on the rainy (it won’t stop raining) East Coast of England working away on the project and have made some good ground.
One thing I’m conscious of in making my argument for penny shares is misleading people if I make it seem like owning more shares in something cheap is better than owning one expensive share because of the price alone.
That’s not the case.
It’s all about the size of the company.
Yet it’s a tool a lot of sales material uses to trick people into thinking there’s a volume advantage. There isn’t. It’s a bit like the 100lbs worth of feathers versus 100lbs worth of rocks… they weigh the same.
Instead, the reason I believe investing in new and exciting small companies is a great way to get on the ‘investment ladder’ so to speak, is because you’re able to invest in a range of small companies that have a much greater chance of becoming game-changing success stories like ASOS, Nichols or Fitbug.
The opportunity for that growth comes from the SIZE OF THE COMPANY. Small companies are more likely to grow at a faster rate than big companies. In turn, so is the VALUE of your shares.
You see, if you buy £1000s worth of shares in a big, established company, the chance of that company growing beyond 20% over the next few years is low. The chance of a company like that returning you over 100% or even 1,000% is even less likely. (And all your money is in one company.)
But by investing in new and exciting small companies a first time investor – who only has a limited amount of disposable income – has a whole different option…
Let’s say you’ve got £1,000 saved up and you want to by £1,000s worth of shares in exiting small companies.
To take into account dealing costs – which you’ll incur, whatever shares you buy – let’s knock £200 off that, 20% of your total.
Your dealing costs shouldn’t be that high (they should probably be less than £100) and as part of the project I’m working on we’ll be putting a guide together that will help you make sure you keep them to a minimum.
But even so, let’s take 20% off – I think you’ll still have more chance of making more money overtime than investing everything in one old, established company.
Indeed, we’ve got £800 left and you split that into five.
You’ve now got the opportunity to invest £160 in five different small companies. So, not only have you got five chances to be invested in the next big company before it takes off… you’ve also sensibly spread your risk across five companies instead of one.
And remember, this is all with just £1,000.
Now, of course, not all of the five companies you invest in are going to take off. Some will founder for many years. Some may even go out of business and you’ll lose the £160 you invested.
But the great thing is, you only need one of those five companies to be a big hitter for your portfolio to suddenly become supercharged.
Imagine you’d put £160 into Fitbug when it was less than a penny a share.
Today, you’d have seen percentage gains (we’re talking in the 1,000s here) that would far and away beat the 5-12% you might have picked up from an established blue chip company.
Shares in Fitbug, for example, rose from 0.375p to 26.5p in a matter of weeks… your £160 would have exploded to over £11k, more than covering the other shares in your portfolio and beating even a healthy 20% gain on the £800 you could have invested in one big company.
Of course, it’s rare that gains are that big. But for a small company share price to double or triple or more is very possible.
That is why I believe investing in new and exciting companies is such a good way for regular people like you and me to turn disposable income into real wealth.
Don’t get me wrong… it takes patience. It can take years for these little companies to take off… and you need to be comfortable with the issues of volatility and illiquidity that plague penny shares… but the fact remains:
There is no doubt putting your money in penny shares has the potential to return you far more than any other investment.
I respect your privacy and will never pass on your email address to anyone else. As this is a free e-letter you may occasionally get some carefully selected advertising messages.
by Max Munroe
Posted March 14, 2013