Penny stocks are companies with share prices below 100p. Further, shares in this bracket have a market cap of £100m or less. This typically means that these stocks are volatile and listed outside of the FTSE 100. However, it can also mean that large opportunities are available as smaller stocks haven’t reached full potential. With that in mind, here’s how I’d put £1,000 of my spare cash to work right now.
Reducing risk by diversifying
Firstly, I’d ensure that I was diversifying my £1,000 via half a dozen penny stocks. I completely agree with the sentiment that small-cap stocks offer more risk. The main way I can reduce this risk is by spreading my money between different options.
My thinking here is that even if one or two of my ideas don’t reach full potential, I have other options that could do well. Given the large upside that could be seen, I only really need one of my stocks to become the next big thing to make my £1,000 investment worthwhile.
I do need to be realistic that there’s a chance none of my stock picks work out. It can be harder to make sound calls, as penny shares usually have less coverage by research analysts and are harder to compare to larger peers.
Hot penny stocks in my favourite areas
After deciding on my diversification strategy, I next want to identify the specific areas I want to select stocks from. This is basically the same top-down thinking I use if I want to invest in a multi-billion pound FTSE 100 entity.
I think good themes at the moment include healthcare, renewable energy, and technology. So I’d filter for these sectors and investigate listed firms that fit the bill. In some ways, investing in smaller companies gives me more niche options.
For example, I might not want to park some money in SSE as an energy play. Rather, I might have a high conviction about helium for commercial use. There aren’t any FTSE 100 helium stocks. Yet I could pick Helium One, a small-cap stock that works in this area.
Having an exit plan from the start
After settling on themes and specific stocks, I need to keep an active eye on my investments. As I’ve noted from recent price swings in popular penny stocks like Woodbois, the price can move quickly! Therefore, when I buy a stock, I want to already have a level in my mind that I want to exit at. I can even place an order to automatically sell at a set price via my investment platform.
This isn’t changing my long-term investment philosophy. My target price could take years to hit. After all, I’m not going to set it to cash out at 10% profit! Yet given the volatility in this type of investment, I want to be sensible and have an exit strategy.