Buying penny stocks? Here's help
Report by ZUL OTHMAN
Stockbroking firms across Singapore buzzed with activity on Monday as investors dumped penny stocks - small-cap shares trading for less than $1 each - suffering huge losses along the way.
On Tuesday, it was reported that the shares of Asiasons Capital, Blumont Group and LionGold Corp nosedived between 75 per cent and 86 per cent.
The three companies dipped in value when trading resumed on Monday after last Friday's shock move by the Singapore Exchange (SGX) to temporarily suspend trading.
This came after all three had enjoyed recent dramatic rises in price which then dropped, prompting SGX queries, reported The Straits Times.
For some, buying into the right penny stocks at the right moment seems like a sure-fire way to make a quick buck. But what are the pitfalls when investing in such stocks?
The New Paper spoke to Mr Rieve Ko (below), a remisier with stockbroking firm UOB Kay Hian, to find out more.
1 WHAT HAPPENED ON MONDAY TO CAUSE INVESTORS TO DUMP THEIR PENNY STOCKS?
Investors were losing a lot of money on Monday, to the tune of $7 billion (off the market capitalisation of several small cap companies) or more.
Several factors had caused the chain reactionof selling down of other penny stocks after the steep sell-off (50 to 60 per cent) of three counters last Friday. One of them was a stop-loss measure, which meant investors who wanted out sold their holdings because the share prices had hit their "exit price".
Sentiment also took a big hit. Novice investors may have panicked and sold after realising how much stocks could fall in the event of a crash.
A wave of sell orders induced others to sell, leading to a stampede or panic selling, forcing the share prices of several small cap stocks to fall over 90 per cent on Monday.
2 WAS IT UNUSUAL FOR THE PENNY STOCKS TO DROP? WHAT ARE THE RISKS OF BUYING INTO THEM?
It is not unusual for penny stocks to drop or rise big in a single day. The characteristic of penny stocks is that they can move 10 per cent or more on an average day with positive returns of 100 per cent or more being very common over even a week or two.
However, what is unusual is for a stock to fall over 50 per cent in a single day.
As for the risks, a major one is the manipulation of prices. Penny stocks are extremely easy to manipulate due to the low average volume of shares traded per day and low prices.
If and when big sellers decide to sell out, the counter may experience a deep fall. And if investors are slow to get out, they will be left holding the bag, facing huge losses.
3 DO YOU CONSIDER IT GAMBLING? WHAT ARE THE LESSONS TO LEARN FROM MONDAY'S EPISODE?
If you have done a through analysis on the penny counters that you are trading in based on sound fundamental and technical analysis techniques, then it would not be gambling, but investing (betting with an edge).
As for the lessons learnt, you need to be disciplined with your trading and investment strategy. Investors should have both exit and profit-taking strategies in place before buying a stock.
Also, do not invest too much money in a single stock. Always diversify.
Stock portfolio structure is also very important.
More money should be invested in the big-to-mid stocks rather than the smaller stocks - usually 80 per cent blue chips and 20 per cent penny would be a good mix to consider in one's stock portfolio.
This way, a crash in penny stocks will not hurt your overall investment much.
News, The New Paper, Friday, October 11 2013, Pg 9