So there I was minding my own business when the following article headline was brought to my attention: “Singapore’s Penny Stocks Roar Back To Life”. The article went on to describe how Singapore’s penny stocks are red hot and that huge volumes had been traded in the Year of the Snake’s first trading sessions.
According to the article, IT consultant Armarda Group (SGX: 5EK) soared 32% to S$0.033. The company neither had an explanation for the surge nor for the huge volume of shares traded. In fact, Armarda reiterated that it expected to report a third-quarter loss, which it duly did on 14 February.
Armarda is what we here at www.fool.sg would describe as a penny stock. Although there is no formal definition of a penny stock, most of us will recognise one when we see one. The shares tend to sell for pennies and are generally thinly traded. They also tend to be very small companies that, probably, don’t have many shareholders and, probably, for a very good reason. Consequently, their share price can be easily manipulated.
Interestingly many private investors are drawn to penny stocks like bees are drawn to honey. That’s because they think low share prices means bargains. They assume that they are better off spending $500 on 25,000 shares of 2 cents a pop than on 10 Jardine C&C (SGX: C07) shares that cost over $50.
Those 2 cent shares might be grossly overvalued while the $50 could be undervalued. Many investors don’t understand this and they are drawn to the 2-cent shares because they think they will quickly double in value. That is a risky assumption though, because the long-term performance of a share depends on the company’s intrinsic value, not its trading price.
Here at The Motley Fool we believe that buying shares is about putting the investing odds in your favour. Buying speculative penny stocks that are unlikely to ever turn into dollar stocks is not our idea of playing the odds. Or as Warren Buffett would say: “Price is what you pay. Value is what you get”.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore Director David Kuo doesn’t own shares in any companies mentioned.