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