Penny stocks in South Africa. Before we explore this subject more deeply, it is important to first take a closer look at the penny stocks, Forex trading, and what it is as well as the advantages and disadvantages of trading penny stocks.
Choose your quick section of our Penny stocks in South Africa review below.
A Quick Overview of our Penny stocks in South Africa Review:
- ✔️What are penny stocks?
- ✔️How to trade penny stocks
- ✔️Penny stock trading strategies
- Advantages of Penny Stocks
- Disadvantages of Penny Stocks
- Penny stocks for the South African trader
Many people ask is Forex trading gambling, largely due to the speculative nature of currency trading, and will therefore often collude the idea of ‘speculating’ with ‘lucky guessing.’
What Are Penny Stocks?
A penny stock typically refers to the stock of a small company that trades for less than $5 per share. In the past, penny stocks were considered any stocks that traded for less than one dollar per share.
Penny stocks are usually associated with small companies and trade infrequently meaning they have a lack of liquidity or ready buyers in the marketplace.
As a result, investors may find it difficult to sell stock since there may not be any buyers at that time. Because of the low liquidity, investors might have difficulty finding a price that accurately reflects the market.
Penny stocks do provide some small businesses with a way to access funding from the public. These companies may use this platform as a starting block to move into a larger marketplace.
Also, since they sell as such low prices, there is room for significant upside. However, some factors exacerbate the risk associated with investing or trading penny stocks. The securities are usually riskier than more well-established companies known as blue-chip stocks.
A Blue-Chip is a nationally recognized, well-established, and financially sound company. Blue chips generally sell high-quality, widely accepted products and services.
Blue-Chip companies typically have a history of weathering downturns and operate profitably in the face of adverse economic conditions, which helps to contribute to their long record of stable and reliable growth.
Since these are primarily small companies, penny stocks are most suitable for investors who have a high-risk appetite. Typically, penny stocks have a higher level of volatility, resulting in a higher potential for reward and, thus, a higher level of inherent risk.
Although penny stocks can have explosive moves, it is important to have realistic expectations whereby investors understand that penny stocks are high-risk investments with low trading volumes.
How to Trade Penny Stocks
Penny stocks and low-priced shares are not right for everyone, despite the fact that they do have a lot of great attributes. They truly can turn a small investment into a large sum of money pretty quickly (but can just as quickly wipe those earnings out).
Define Your Risk
You should only invest in penny stocks with risk money or those funds that you can afford to lose.
You also should only start your penny stocks trading career by approaching low-priced shares once you have gained significant knowledge, and have a strong stomach for the potential volatility.
This volatility can sometimes be found in investments trading at the lowest prices.
Practice with Paper Trading
You can avoid big mistakes by learning how to trade with the risk-free, no-money-required method of buying and selling low-priced shares, known as “paper trading.”
All you need is a pen and a piece of paper to keep track of imaginary trades in real stocks, using a portfolio of imaginary money.
This will probably be the best thing you will ever do in terms of penny stocks. By tracking imaginary profits on your imaginary paper trading, you can make a more knowledgeable jump into real money.
This will also help you learn all the important penny stock jargon, learn from your mistakes, and appreciate all the things to look for when you try to find the next penny stock winner.
After you have paper traded for a couple of months, you will be much better in every respect when it comes to buying and selling speculative shares.
Do Your Research
Make sure the penny stock companies you’re interested in are legitimate. Do your due diligence and look into companies before throwing a few hundred dollars at their cheap shares.
You can go to the Johannesburg Stock Exchange (JSE) website to see if the stock has been recently delisted from a major exchange. You can also get copies of the company’s most recent SEC filing to get an idea of the company’s overall financial health.
It’s important to understand how the company makes money. A stock screener can help you filter stocks based on criteria like price per share. From there, you can dig into a company more individually.
Research does require additional time, but it increases your odds of success.
Find the Right Broker
To buy shares in a particular company, you need to find someone who not only owns shares of the same company but is also willing to sell them to you. This is what your broker does for you.
Through your broker’s trading platform they route your buy and sell orders to other buyers and sellers through their connection with the stock exchange that lists the shares of the company you are trading.
As your broker will hold the capital you want to trade or invest with, it is important to choose the right broker, ideally one that offers the highest regulation and security as possible.
Penny Stock Trading Strategies
Day Trading Strategies
This style of trading is where traders buy and sell shares within a single trading day and exit by the end of the day. It is rare for day traders to hold trades overnight. Traders would typically use the lower timeframes when making trading decisions.
While day trading penny stocks seem attractive to many beginner traders it is very risky. This is because the trader has to process a large amount of data and analysis in a short period of time which allows for errors, frustration and drained willpower.
Most new traders are simply not ready to take a high number of traders in a short period of time.
Swing Trading Strategies
This type of trading strategy involves traders holding stocks and shares for several days and in some cases several weeks.
Swing traders will often use a combination of fundamental and technical analysis in their trading decisions with more weight placed on technical analysis and the use of technical indicators such as moving averages
Moving averages are used to help identify and confirm the overall trend of the market. This gives the swing trader the directional bias to trade in – long or short.
Swing traders will also often use overbought and oversold indicators such as the Relative Strength Index (RSI), Stochastic Oscillator and others.
These help to identify overbought and oversold conditions in the market and therefore potential turning points where the market could change direction. Ideally, these indications would be in line with the overall trend of the market as confirmed by the moving averages.
However, they can also be used for reversal swing trading. This is where traders aim to identify the end of a trend by using indicators and oscillators to find reversal divergences between them and price.
Investment Strategies
Investing strategies have a lot of similarities to trading strategies. The biggest difference is the holding period.
Investors typically look to hold shares for many months or years and try to capitalize on the potential for a long-term capital gain, or for a penny stock to turn into a blue-chip stock.
If you are thinking of taking a long-term view on penny stocks, or other stocks and ETFs from around the world, you may consider the Invest.
Advantages of Penny Stocks
Following upcoming growth: There are many excellent companies trading for pennies. They have proven management teams, rock-solid financial positions, growing market share, improving financial ratios and disruptive products or services that are set to dominate an industry.
Excitement: For anyone who has made 5% on an investment in a year, they understand the excitement which comes with the big gains and losses among penny stocks.
Turning Small Investments Into Much More: The majority of penny stock investors have small amounts with which to start trading.
If a person has $500 to trade, they may only buy three or four shares of a bigger company but could purchase thousands of shares of the penny stocks in which they are interested.
Speed: Not all penny stocks see quick movement in their market price, but the ones which do can typically make their big price moves within days, not years.
Disadvantages of Penny Stocks
Low-Quality Companies: The majority of penny stocks are low-quality companies. In some cases, this is because their financial position is a train wreck, their balance sheet is frightening, and their operations are producing large losses.
Alternatively, they may have a questionable product in a dying industry with numerous competitors.
Risky Markets: Some penny stocks trade on the New York Stock Exchange, the American Stock Exchange, and the NASDAQ (including their lower-level Bulletin Board market).
This means all the underlying companies have listing standards, reporting requirements, and investor communication obligations.
However, the majority of low-priced shares trade on the Pink Sheets, OTC, or OTCQX, where the listing fees, requirements, and reporting regulations are almost non-existent. These low-caliber marketplaces (technically, these are not even stock exchanges) attract lower-quality companies by the thousands.
Different Stock Broker Regulations: Many stockbrokers will have higher commission rates for trading penny stocks if they even allow it at all. Most will not accept special trading orders, such as stop-losses.
Thinly Traded: Unlike larger companies that may trade tens of millions of shares each day, some penny stocks are very thinly traded. Many see an average of a few thousand shares exchanged daily, while others may see even less trading volume.
Volatility: Rapid and significant price moves are great when they go in your favor, but there are two sides to the volatility coin.
Penny Stocks for the South African Trader
There are a few different ways to define South Africa’s penny stocks. Some definitions say it’s listed companies with a market cap of less than R1, 5 billion, which is why penny stocks are also commonly referred to as small-cap stocks.
Another definition is stocking with a share price of anywhere between 10c to R10 per share. However, this is a rather vague definition.
On the opposite side of the scale to penny stocks are Blue-Chip stocks. In comparison to penny stocks, Blue-Chip stocks are large listed companies that have been around for a long time and have a long, stable financial track record.
Some of South Africa’s biggest and most well-known companies are considered blue chip stocks, such as British American Tobacco, Naspers, BHP, and Anglo American.
While penny stocks in most cases pay no dividends, blue chips stocks almost always do.
How to Buy Penny Stocks in South Africa
Choose a share trading platform. If you’re a beginner, do your research before you choose.
Open your account. You’ll need your ID, bank details and possibly one or two other FICA documents.
Confirm your payment details. You’ll need to fund your account with a bank transfer, debit card or credit card.
Find the shares you want to buy. Search the platform and buy your shares.
Global Penny Stocks Worth Considering
Future Fintech Group Inc.: Chinese company Future Fintech Group operates a blockchain e-commerce platform with other activities in developing financial technology.
Pivot Technology Solutions Inc.: Pivot Technology Solutions is a Canadian company that acquires and integrates companies with IT capabilities. Through multi-vendor sourcing and implementation solutions, Pivot utilizes its acquired companies to support the IT needs of its customers.
On September 9, the company announced that it had entered into an agreement whereby Computacenter plc. and its subsidiary would acquire all outstanding shares of Pivot for an equity value of roughly CA$105.8 million (USD $80.4 million).2
Quarterhill Inc.: Quarterhill is a Canadian internet service company focused on connectivity of machines and sensors.
The company caters to customers in industrial applications such as mining, oil and gas, and manufacturing. In August, Quarterhill reported a 68.2% decline to net revenue year-over-year (YOY) for Q2.
The company posted net income of CA$9.5 million (USD $7.2 million) for the period, after reporting a loss in the same period a year earlier. The net income was due in part to Quarterhill’s sale of asset maintenance software company VIZIYA.
- Photon Control Inc.: Canadian company Photon Control offers fibre optic measurement services.
The company designs and builds optical sensors and other tools to measure position and temperature and serves customers in the semiconductor and wafer fabrication industries.
On September 16, Photon Control announced that it had entered into a distribution agreement with Woowon Technology Co.
This partnership provides the company with access to the South Korean market, which is the world’s second-largest semiconductor market and accounts for roughly 20% of the global chip market overall.4
- Cheetah Mobile Inc.: Cheetah Mobile is a Chinese internet and mobile software developer. The firm specializes in developing and operating internet browsers and security applications, mobile games, memory-saving solutions, and related services.
Conclusion
Penny stocks are traditionally identified as equities that trade at the low end of the ranges of prices found in the market, often less than a dollar or for “only pennies.”
The U.S. Securities and Exchange Commission currently considers the term “penny stock” to refer to “a security issued by a very small company that trades at less than US$5 per share.”
Some companies that are just starting out may take years to reach elevated share prices or payout attractive dividends, and investors can’t always be certain of the timetable for their investments in these shares to become profitable.
However, one of the strong attractions of penny stocks is that investors with little capital can buy large volumes of shares at low prices, and thus see a profit if the shares show large price movements.
For example, a small investor could buy 10,000 shares of a stock at 20 cents per share for US$2,000.
If the share price moves to 30 cents per share, the investment would then be worth US$3,000, and the investor could sell the shares for a profit of US$1,000 less transaction costs such as broker commissions and taxes.
If the share instead dropped to 10 cents, and the investor sold the investment, the loss would be $1,000.
Generally, penny stocks are traded on over-the-counter markets (OTCs). They are less formal and less regulated off-exchange markets where investors can find less well-known and potentially lucrative securities that aren’t available on major exchanges.
In the U.S., OTCs are managed by the Financial Industry Regulatory Authority (Finra) and the OTC Markets Group, Inc.
Some penny stocks may also be found on regular exchanges. OTCs, however, specialise in penny-stock trading on platforms such as Finra’s OTC Bulletin Board and OTC Link LLC.
The OTC Bulletin Board is accessible to securities dealers, and the OTC Link operates two marketplaces where penny stocks can be traded: the OTCQB and the OTC Pink.
OTCs are restricted to brokers and dealers, but most online brokerages can execute trades of securities listed on them
While there are legitimate companies traded as penny stocks, it may be very difficult for investors to find current or reliable information about those companies as they tend to be closely held or extremely small.
Additionally, penny stocks rarely pay dividends. Based on those characteristics, penny stock trading is often considered a gamble.
Penny stocks are often considered too risky for a novice traders. Extreme caution should always be taken when considering penny stocks.
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