Share club investors play with pennies from hell

When you deal in those little shares, remember, all that glisters is not gold

True private investing - using your own money to buy a handful of shares chosen from the 2,700 that comprise the London Stock Exchange listing - is a serious business. It can be particularly wearing on the nerves when the fickle Mr Market takes a downturn for no apparent reason. Or, worse still, your chosen few, selected with such loving care, fail to perform while the rest of the market bounces blithely upwards.

True private investing - using your own money to buy a handful of shares chosen from the 2,700 that comprise the London Stock Exchange listing - is a serious business. It can be particularly wearing on the nerves when the fickle Mr Market takes a downturn for no apparent reason. Or, worse still, your chosen few, selected with such loving care, fail to perform while the rest of the market bounces blithely upwards.

Invariably the private investor's money has been hard earned and, although the potential rewards are good, the unpredictability makes it a no-go area for the faint-hearted. But if you can stand the heat, private investing is an exciting kitchen. It is also addictive which is perhaps why share-related competitions are proving so popular - they give the investor an opportunity to indulge his or her fantasies without risking real money.

The latest fun contest for investors appears every weekday on Channel 4. A half-hour is given over to teams of amateur punters who wield a fictitious £100,000 in the hope of making a profit during the 13-week series. There's a resident guru who pontificates on the investors' choices and a different chief executive on each programme who has one minute to try to persuade the team of the day they should earmark a substantial proportion of their fantasy portfolio to buying his or her shares.

I watched entranced this week as a team of three brothers basked in the warmth of having added more than £20,000 to their portfolio in just seven days, thanks mainly to a couple of penny shares that had leapt in value.

Newspapers too are capturing the interest of their readers by linking competitions to the unpredictable movements of the stock market. A popular Sunday newspaper gives £1,000 away every month to the investment club that tips the biggest percentage mover.

Hundreds of clubs enter the contest and most months the increases are staggering. In October a team of teachers took the £1,000 with Network Technology (11p to 21p, a 90 per cent rise). In September African Gold, chosen by a Harrogate investment club, showed a 162 per cent increase from 2p to 5.25p. August saw a club of Stockport investors, who had teamed up after attending an investment class, nominate a Dublin-based oil exploration outfit called Providence Resources. During the month it moved from 0.66p to 1.32p which, for pedantic mathematicians, is 98.49 percent.

On the face of it, these share tipping contests are harmless entertainment. They are a way for us nail-chewing investors to let off steam by speculating on risky shares using Monopoly money. But for viewers or readers who happen on them by chance they could give a seriously misleading impression of the world of investing.

The inexperienced investor could easily get the idea the road to riches is paved with penny shares. Sadly, nine times out of 10 they are the route to disillusionment and disaster and have no significant place in the portfolio of the serious private investor.

There will always be exceptions that prove the rule. Get-rich-quick merchants will quote the example of Martin Sorrell, the ad-man who took over a moribund company, WPP, which had all but ceased to make supermarket trolleys, and turned it into a huge international advertising business.

But, generally, penny shares are priced so low because the market makers - those professionals who decide what each share should be bought and sold at - have resolved that pennies is all they are worth. Usually, the shares are in the doldrums for one of two reasons. Either they have no track record and are offering promises rather than results, or their recent performance has been so poor the share price has fallen to rock bottom. Guessing when the good times are going to come is an expensive game for the private investor.

But the real danger lies in the bid-and-offer spread of penny shares. Let us consider African Gold, the share that scooped £1,000 for a North Yorkshire investment club a couple of months ago.

When I looked at my real-time price screen earlier this week African Gold's mid-price price had dropped from the heady August heights of 5.25p to 3.25p. But the offer price - what you would have to pay if you wanted to buy the share - was 3.75p. And if you already owned African Gold shares and wanted to sell them the bid price quoted was 2.75p.

Put simply, this means that when you bought the shares at 3.75p you would already have effectively lost about 30 per cent of your money. Add to that the amount the broker would charge you for carrying out the transaction and the iniquitous stamp duty the government insists on charging and the whole business becomes hideously expensive.

For reasons of brevity, the television shows and newspaper competitions do not take into consideration such complications as bid-and-offer spreads or dealing charges and stamp duty, but in the real world they are essential features of every deal. So, by all means watch the money shows and enter the newspaper competitions. You might learn a thing or two and pick up a few investment ideas.

But when it comes to penny shares remember all that glisters is not necessarily gold. Particularly African Gold.

Independent Partners; request a free guide on NISAs from Hargreaves Lansdown

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