Penny shares can cost you a packet

A BEGINNER'S GUIDE TO INVESTING IN SHARES: Magnus Grimond offers a word of caution to get-rich-quick speculators

THE STOCK MARKET attracts the avaricious and no part of it more than the get-rich-quick speculative end of the market. Penny shares, traded options, bombed-out shell companies - many punters see them as an opportunity to multiply their money several times with minimum effort. But beware: today's booming markets will attract the attention of the inexperienced and the foolish. They tend to pile in at the top and limp away later nursing big losses.

Having got that severe wealth warning out of the way, let's be clear: you can make a load of money from speculative investments, but you have to work hard at it and you have to have strong nerves. For those with the stamina, there are plenty of high-wire investments.

Penny shares have been some of the most popular. The argument is that when shares fall to low levels, not necessarily pennies but below 50p or 10p say, it takes little for them to double, triple, quintuple or more. Often, too, they can be ripe for recovery, as a new management or new business is injected into the shell of the old.

Every decade seems to have had its legendary penny share. At the end of the 1960s, a tiny nickel-mining company called Poseidon set off what was described as "the greatest mining boom in Australia's history". The shares soared from just under 200p in September 1969 to pounds 124 the following February, but by 1976 the company was in receivership.

The 1980s miracle share was Polly Peck and a more extraordinary story has hardly ever been told. Between 1980 and 1983 Asil Nadir's rag-trade- to-fruit-packing group saw its shares gallop from 9p to more than pounds 35, before halving again. The shares yo-yoed their way through the 1980s as allegations ranging from gun-running to fraud dogged Mr Nadir. While the brickbats flew, Polly became a FT-SE 100 (Footsie) company, worth more than pounds 2bn. But 1990 proved to be its nemesis. Polly crashed into receivership and ignominy, while its chairman was forced to flee the country.

The old ones are the best ones, so they say, so perhaps the 1990s will be remembered for Bre-X Minerals. The Toronto-listed mining minnow sprang to fame after claiming it had found the largest gold mine in the world. The shares rocketed from a few cents to nearly C$28 in 18 months. Surprise, surprise, by early last year the price had crashed back to where it started amid sensational claims of fraud and even suicide.

Not all penny shares have been disastrous. Next at 12.5p in 1991 now stands at close to 800p. Or there is Jarvis, an unknown property and construction group until 1996. Three years ago the shares could be picked up for as little as 9p. Then the company picked up a railway maintenance company or two on the cheap and today the shares change hands at more than 500p.

Who could have predicted these successes and failures? Well, many tip sheets (newsletters sent to limited subscriber lists) and newspapers claim to be able to spot winners. The results, almost without exception, are pretty dismal. The latest survey by Tip Tracker, a newsletter that monitors the newsletters, shows that only Jim Slater - he of Slater Walker notoriety - has consistently outperformed the market over the past two years. Otherwise, you would have been better off in a Footsie tracker fund.

For the aficionados, real investment "gearing" is to be had from warrants, options, split capital trusts and the like. Warrants and options are probably the simplest to understand. Issued by the company, they give the holder the right to buy its shares at a fixed price at, or up until, a date in the future.

Take Ladbroke. At a time when the shares were recently changing hands at 285p, you could have bought the May 280p "calls" (that is, giving you the right to buy the shares at 280p in May) for around 22.5p. Because they were so close to the current price, nearly all of the option price represented "time value", that is the time left before the option expired. By contrast, the May 330p calls ( which were "out of the money") costing 5.5p and the May 260p calls (which were "in the money") at 34p reflected the "intrinsic value" or lack of it in exercising the option.

Options need not be speculative. If you were bearish, you could take out a Footsie index option which would effectively insure you against losses below a certain level. But this "put" insurance does not come cheap: cover for a pounds 50,000 portfolio could easily cost pounds 1,000 or more.

There is something for every taste in speculative investments. But unless you have retired with a huge nest egg or can trade on a semi-professional basis, options and other fast-moving markets are not for the dabbler.

Suggested Topics
Start your day with The Independent, sign up for daily news emails
ebooksAn unforgettable anthology of contemporary reportage
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Digital Optimisation Executive - Marketing

£30000 - £35000 per annum: Recruitment Genius: The UK's fastest growing, multi...

Recruitment Genius: Financial Reporting Manager

£70000 - £90000 per annum: Recruitment Genius: A Financial Reporting Manager i...

Recruitment Genius: Payments Operations Assistant

£23000 - £25000 per annum: Recruitment Genius: They win lots of awards for the...

Recruitment Genius: Telephone Debt Negotiator

£13500 - £20000 per annum: Recruitment Genius: This nationwide enforcement com...

Day In a Page

Sepp Blatter resignation: The beginning of Fifa's long road to reform?

Does Blatter's departure mean Fifa will automatically clean up its act?

Don't bet on it, says Tom Peck
Charles Kennedy: The baby of the House who grew into a Lib Dem giant

The baby of the House who grew into a Lib Dem giant

Charles Kennedy was consistently a man of the centre-left, dedicated to social justice, but was also a champion of liberty and an opponent of the nanny-state, says Baroness Williams
Syria civil war: The harrowing testament of a five-year-old victim of this endless conflict

The harrowing testament of a five-year-old victim of Syria's endless civil war

Sahar Qanbar lost her mother and brother as civilians and government soldiers fought side by side after being surrounded by brutal Islamist fighters. Robert Fisk visited her
The future of songwriting: How streaming is changing everything we know about making music

The future of songwriting

How streaming is changing everything we know about making music
William Shemin and Henry Johnson: Jewish and black soldiers receive World War I Medal of Honor amid claims of discrimination

Recognition at long last

Jewish and black soldiers who fought in WWI finally receive medals after claims of discrimination
Beating obesity: The new pacemaker which helps over-eaters

Beating obesity

The new pacemaker which helps over-eaters
9 best women's festival waterproofs

Ready for rain: 9 best women's festival waterproofs

These are the macs to keep your denim dry and your hair frizz-free(ish)
Cycling World Hour Record: Nervous Sir Bradley Wiggins ready for pain as he prepares to go distance

Wiggins worried

Nervous Sir Bradley ready for pain as he prepares to attempt cycling's World Hour Record
Liverpool close in on Milner signing

Liverpool close in on Milner signing

Reds baulk at Christian Benteke £32.5m release clause
On your feet! Spending at least two hours a day standing reduces the risk of heart attacks, cancer and diabetes, according to new research

On your feet!

Spending half the day standing 'reduces risk of heart attacks and cancer'
With scores of surgeries closing, what hope is there for the David Cameron's promise of 5,000 more GPs and a 24/7 NHS?

The big NHS question

Why are there so few new GPs when so many want to study medicine?
Big knickers are back: Thongs ain't what they used to be

Thongs ain't what they used to be

Big knickers are back
Thurston Moore interview

Thurston Moore interview

On living in London, Sonic Youth and musical memoirs
In full bloom

In full bloom

Floral print womenswear
From leading man to Elephant Man, Bradley Cooper is terrific

From leading man to Elephant Man

Bradley Cooper is terrific