‘Penny shares’ or ‘penny stocks’ it the term for shares with a low price. Shares with a price below 1 GBP in the UK, 1€ in Germany, 5$ in the US and 5-10 DKK or SEK in Denmark and Sweden. In Danish and Swedish, the term is ‘stamp share’ (‘frimärksaktie’ in Swedish, ‘frimærkeaktie’ in Danish) referring to the similarity of price of sending a letter and the share price. In Germany, the term is ‘Kleinaktien’ – small share – refers, I guess, not as much to the physical size of the share, but the company behind.
Penny shares – start or end of life circle?
The term Penny share is often used negatively, indicating that a share at this price-level is not worth giving much attention, or indicating that this is the final stage before bankruptcy. Penny shares are shares on the brink of collapse. A share in deep crisis or at the end of its life circle – victim of bad businessman-ship or of financial crisis.
Of course they sometimes are. When in deep crisis investors flee and the share price drops steeply. Check out the Wikipedia-entry on the Enron scandal and see the chart of the share price development as the share plunged from 90$ to nothing in a little more than a year prior to the bankruptcy in 2001.
On the other hand, penny shares also occurs at the opposite end of the life circle. Companies listing at an early stage often begin their life at the share market as penny shares.
Penny shares – IPO
Before an IPO, a number of questions have to find their balance. First, how much cash should the IPO raise? Second, how much of the cake are the current owners willing to give up? Third, how many shares will secure a broad investor base and secure the liquidity of the share? Fourth, is additional issues planned as the company develops?
The balance sometimes ends with a high issuing price. The best current example is Photocat with a high price of 29 SEK and relatively few shares (my latest post on Photocat). In other cases, the price is low – the best example, I recall, is Delta Minerals issuing units (1 share + 1 warrant) for the price of 0.40 SEK in spring 2014. Find teaser here.
Delta Minerals was selling 21 million units and raising 8.5 MSEK and Photocat 775.000 shares aiming at 22.5 MSEK.
Generally, though, most of the IPOs where I have participated, the issuing price is in the ‘stamp area’ below 10 SEK: Cybaero 7 SEK, Cantargia 7.6 SEK, Dignitana 6.5 SEK, Phase Holographic 3.1 SEK etc.
Penny shares in my portfolio
With the exception of IVISYS and Cantargia (still below 10 SEK) almost all the shares in my portfolio started as penny shares and have risen above. In the table below, it is obvious that the number of shares in each company reflects a different balance of the questions mentioned above. Both Fortnox and Nexam have well above 50 million shares, while the two Danish companies, Photocat and IVISYS are the companies with the least shares.
The number of shares along with the free float (approximately the number of shares not held by majority owners and insighters) determines the liquidity of the share. As I have pointed out in earlier posts, a low number of shares combined with low free float is leaving the share almost illiquid, and are not in the interest of the investor. Just one example: IVISYS. The number of shares are low and the founder holds app. 75% of the shares. This combination indicates the possibility of low daily turnover of the shares. And yes. On Friday October 30, the number of IVISYS shares sold were in total 2.161 – a turnover of 13.753 SEK in 7 trades. I know that it was partly a closing day due to All Saints, but the turnover was still in the high end compared to normal days – and the day ended with an extremely low spread of just 1,5 % (the difference between buy and sell). Often the spread is far larger. In comparison, the turnover in Nexam was 59.542 shares in 69 trades (647.020 SEK).
So for my part, I tend to favour cheaper shares, penny shares – and larger numbers – because a liquid market gives the investor better opportunities. I prefer penny shares above low liquidity shares!
By the way… The Danish mail have just announced a 90 % rise in tariffs for letters. At the new tariff of 19 DKK (= 23.75 SEK) all my shares, except G5 Entertainment and Phase Holographic, are once again cheaper than a stamp for an ordinary letter… LOL, as my kids says!