The pros and cons of buying penny shares in 2023

Why might 2023 be different for penny stocks than other years? We are teetering on the edge of a global recession. The individual economy has been going through tough times, and the situation seems to be getting tougher.

That makes me think the stock market could be in for a very volatile year in 2023. And when that happens, smaller stocks often experience more volatility.

Volatility can mean more opportunities for short-term gains. So it’s very tempting to look for candidates among penny stocks when the market is bumpier. But the get-rich-quick opportunity definitely carries more risk than losing it all overnight, too.

What are penny stocks?

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

But among the penny stocks that are actively traded every day, there are many with a market cap of only a few million, or even less.

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

low price pro?

This extremely low price is often cited as one of the pros of penny stocks. Invest a little, and get a bagful of shares. Then even a modest recovery can put us a lot in money, folks claim.

But the stock is priced at a fraction of a penny often has resulted in a huge collapse, and a wipeout for investors.

And a large number of shares for not a lot of money is useless. Investing £1,000 is risking £1,000, no matter how many shares you buy. The buy-sell spread is often wider with penny stocks as well, adding more risk.

best buy?

I think there are some potential recovery candidates among the penny stock ranks, mind. So how do you find the best buys in 2023?

I look for companies that are profitable, or that show a confident prospect of achieving profitability over the next few years. I also want enough funds to reach that profit point.

Some seem to promise success just around the next corner, but constantly issue new shares to raise fresh cash. And it can go on for years. If they succeed, early investors can easily see their holdings diluted to almost nothing.

After the bust

Good buys can be found among oversold stocks. Startup companies often experience an early growth slowdown. Investors pile in when they see a good thing, then dump stocks when there are signs of danger.

I think looking for growth stocks that get past that initial trauma can be profitable. It can be good to buy when it is marked down unfairly, and before it becomes a long-term growth pattern.

Wait a minute…

But still. What I am describing here is an approach to buying stocks in general. Good company, long-term potential, healthy balance sheet, attractive valuation… Nothing to do with share price, right?

So what are the pros, specifically, of buying penny stocks? Hmm, maybe not.