Penny stocks are considered by many investors to be the bargain basement of the stock market. These are the stocks that are ideally suited to those with not so much spare cash who simply wish to have a piece of the action. Sometimes they can be brilliant investments, but other times it’s a massive gamble.
These penny stocks tend to be smaller companies and can often be more difficult to predict how well they will perform in the future. While I’d recommend avoiding penny stocks (those that are less than a few $ or £), you can find some great deals at the low-cost end, especially if you know of the company or have a strong belief in future growth.
An exchange-traded fund (or ETF) offers investors a means to invest in a wide range of shares or bonds using a single ticker and listing. An ETF usually tracks a single market, for instance, the FTSE 100 or NASDAQ. It’s very similar to mutual funds, but are traded throughout the day and are listed on exchanges.
These are collections of securities in the form of stocks, allowing one to purchase shares in an ETF, which corresponds to owning shares in various holdings. For instance, if you choose the iShares NASDAQ 100 ETF, you can invest in top companies on the NASDAQ exchange, including Apple, Microsoft, and Amazon.
It works a little like those pie features you’ve seen popping up on brokerage platforms that allow you to invest a small percentage in various stocks.
Fractional shares are here
More and more brokerages are offering fractional shares, which involves them selling you part of a single share. Instead of spending a full £100 on an Apple share, you can invest just £50 for 0.5, or even less. The market value and dividend payments will be calculated accordingly.
Before fractional shares, penny stocks were viewed as the go-to option for any investor who doesn’t have much capital to spend. But now we have fractional shares at brokers like Trading 212 and FreeTrade, retail investors have far more choice at a lower cost.
Fractional shares also allow for faster and more efficient portfolio diversification, especially if a pie chart system can be utilized. These automated features allow you to set specific percentage values per stock and the broker platform will buy and sell shares accordingly to meet these limits.
For instance, you could create a REIT pie with the following diversification goals.
|British Land Company||25%|
The platform would then purchase accordingly, depending on how much you invest into the pie on a regular basis. Say you have a schedule set up for £100 to be inserted into the above stock pie. £25 would be used for AGNC and British Land Company, while £50 would be reserved for Realty Income.
You could load up more than three stocks and have a fully diversified pie within your portfolio without having to pay for full shares, thanks to fractional shares.
Still worth it … sort of
Now, because we have ETFs and investment pies, that doesn’t mean you shouldn’t analyze penny stocks and invest your money where you feel comfortable. Do your own due diligence and be sure that whichever company you choose to invest in, you believe in future growth.