Types of Penny Share
Below are a few examples of different categories of share which most penny shares will fall into.
Young or New Issue Shares
The majority of penny shares and small cap stocks will be young companies which have been operating for only a short period of time or have only recently become public. The vast majority of companies would have at one point started out as penny shares before the growth of the company took them skywards. This shows the fundamental thrill of investing in these types of companies - their potential is limitless.
These are companies which were once performing much better and have now, for one reason or another, fallen out of favour seeing their share price tumble significantly. These companies then offer the potential that they may be turned around, usually through business restructuring, and may return back towards their former glories.
One extreme type of recovery situation may be a shell company. This is a company that has no significant assets or operations, possibly because it has ceased trading, but is structured for new management or for a substantial shareholder to seize control causing an upturn in its prospects.
These are shares that rise and fall in value according to the economic climate or a certain business cycle. These shares will fall and rise in relation to their particular industry sector or may be tied to the overall state of the economy. Investors will ideally look to invest in the stocks at the bottom of the cycle before the upturn. Typical cyclical stocks may include those in the transport and automobile manufacturing sectors which tend to prosper in growing and expanding economies and tend to do poorly during down business cycles.
The opposite of cyclical shares, these are stocks that tend to do well in periods of economic depression. They are generally companies whose products or services enjoy steady demand and therefore become more popular when less steady industries may become too risky. Defensive shares can be found in industries such as food and utilities - things that consumers will not tend to cut back on during periods of belt tightening.
These are exceptionally volatile companies as they offer little or no tangible assets to provide stability to the share price unless they are a traditional 'bricks and mortar' company who have diversified into a web based company. Share prices in internet companies may rise and fall rapidly in short periods of time, often amplifying any movement in the sector as a whole.
Young biotechnology companies can make for very speculative investments. Often fewer than 10% of their products will reach the development stage but this can make them extremely exciting prospects as one successful product could send the share price rocketing.