Penny Stocks are usually flocked to by day traders, amateur investors, and treasure hunters in search for fortune as they can offer outsized gains. On the other hand, they are usually shunned by more conservative investors due to their extreme volatility, the lack of information available, and the relatively small size of the companies.
In this article we are going to break down penny stocks, whether you should invest in them and give our recommendation on the best way to do so in a halal way.
What are Penny Stocks?
Penny stocks are publicly listed companies that generally have a share price of below £1 in the UK and below $5 in the US. Their market capitalization (the overall value of a company) tends to be below £100m in the UK and below $300m in the US.
As they are small companies, often good news, real or perceived can lead to great gains in a relatively short amount of time in comparison to more mature companies. They are indeed volatile and therefore should be part of a well-diversified portfolio and doing your due diligence is critical.
Where can you find them in the USA/UK/globally?
Some penny stocks are listed on large exchanges such as the Alternative Investment Markets (AIM) and the New York Stock Exchange (NYSE), however the majority trade on the over-the-counter (OTC) market. OTC trading is when trading is done directly between two parties without the involvement of an exchange.
The best global brokerage option is Interactive Brokers. It does not have the best user interface but its main advantages are that it is available in over 200 countries and has a wide selection of stocks including OTC stocks.
For UK investors, if the penny stock is listed on AIM, then most UK brokers should be able to offer you these stocks. It’s best to go with the more established brokers like your AJ Bells and Hargreaves Lansdown who will have access to a wider range of companies than the low-cost brokers. For more information, we recently did a UK stock broker comparison which you can check out here.
If you are looking for US specific broker options, take a look at the likes of M1 Finance, Fidelity, Charles Schwab and TD Ameritrade who all facilitate penny stock investing .
2 Famous examples of Penny Stocks
- Monster Beverage Corporation
World renowned energy drinks maker, Monster Beverage Corporation whose Monster Energy drinks are a staple of the university student’s revision diet was once a penny stock. In the early 2000s its share price was trading for under 10cents. Since then the company has kicked on and recently reached an all time high of $95 a share in January 2021. Monster are a great example of a cheap company blossoming over time as it grows and delivers on its strategy.
- Argo Blockchain
A more recent example of a penny stock is cryptocurrency miner Argo Blockchain. It is currently one of the most popular stocks in the UK in 2021, having initially started life as a penny stock in 2018 listed on the London Stock Exchange . Back in March 2020 the share price was trading at 3.3p per share. 1 year later the share price has reached 220p a share, which is a phenomenal return.
Argo benefited from the latest bull cycle of bitcoin which it mines, earning revenue from the mining process and also from the value of the bitcoin it holds.
Best way to gain exposure
So done correctly, penny stocks can provide great exposure to high risk high reward investments in your portfolio.
Of course, like the success stories, there are many notes of caution too and a bunch of companies fold every year too.
So the safe way to invest in penny stocks is to hold a basket of these shares and to look at what the pros are investing in.
For Muslims, the challenge is that all the top-performing AIM index funds are not sharia-compliant.
So we’ve come up with a solution for that.
The IFG Fund Replicator strips out the non-compliant stocks from the holdings of the top funds in this space. This allows you to gain access to high growth, pre-vetted, sharia-compliant stocks in a relatively risk-controlled way that you couldn’t otherwise access. You can check that out here.
If you want to learn more about investing, check our Halal Investing 101 Guides