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The pros and cons of buying penny shares in 2023

Stacks of coins

Why might 2023 be any different for penny shares than any other year? We’re teetering on the edge of global recession. Individual economies have had a tough time, and things look like getting even tougher.

That makes me think stock markets could be in for a volatile year in 2023. And when that happens, smaller stocks often experience wider swings.

Volatility can mean more opportunities for short-term gains. So it’s very tempting to see candidates among penny stocks when markets are bumpier. But opportunities for get-rich-quick gains inevitably bring greater risks of losing it all overnight, too.

What’s a penny stock?

In the UK, a penny stock is one with a share price under £1 and a market cap under £100m. At the top end of the scale, there are some reasonably stable companies.

But among penny stocks actively traded every day, there are plenty with market caps of just a couple of million, or even less.

Prices are often very low, even less than a penny. One popular stock from a few years ago is now down around 0.05p. We could buy 2,000 shares for just £1.

Low price a pro?

These very low prices are often touted as one of the pros of penny shares. Invest a little, and get a sackful of shares. Then even a modest recovery could put us seriously in the money, folks claim.

But a share priced at a fraction of a penny is often already the result of a huge collapse, and a wipeout for investors.

And a large number of shares for not much money is meaningless. Investing £1,000 is risking £1,000, no matter how many shares it buys. The buy-sell spread is often a lot wider with penny shares too, increasing risk further.

Best buys?

I do think there are some potential recovery candidates among the ranks of penny shares, mind. So how will I go about finding 2023’s best buys?

I look for companies that are profitable, or show convincing prospects of reaching profit within the next couple of years. I also want enough funding to reach that profit point.

Some seem to promise success just around the next corner, but are perpetually issuing new shares to raise fresh cash. And it can go on for years. If they’re ever successful, early investors could easily see their holdings diluted to nearly nothing.

After the bust

Good buys can be found among oversold stocks. Startup firms often go through early growth share pains. Investors pile in when they see a good thing, then dump their shares when there’s a sign of danger.

I reckon looking for growth stocks getting past such early trauma can be profitable. It can be good to buy when they’re unfairly marked down, and before they settle into a long-term growth pattern.

Wait a minute…

But hang on. What I’m describing here is my approach to buying shares in general. Good companies, long-term potential, healthy balance sheets, attractive valuations… It’s nothing to do with the share price, is it?

So what are the pros, specifically, of buying penny shares? Hmm, maybe there aren’t any.

The post The pros and cons of buying penny shares in 2023 appeared first on The Motley Fool UK.

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Views expressed 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.