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
News
A 1930 image of the Karl Albrecht Spiritousen and Lebensmittel shop, Essen. The shop was opened by Karl and Theo Albrecht’s mother; the brothers later founded Aldi
people
Arts and Entertainment
Standing the test of time: Michael J Fox and Christopher Lloyd in 'Back to the Future'
filmA cult movie event aims to immerse audiences of 80,000 in ‘Back to the Future’. But has it lost its magic?
Arts and Entertainment
Flora Spencer-Longhurst as Lavinia, William Houston as Titus Andronicus and Dyfan Dwyfor as Lucius
theatreThe Shakespeare play that proved too much for more than 100 people
News
exclusivePunk icon Viv Albertine on Sid Vicious, complacent white men, and why free love led to rape
PROMOTED VIDEO
Arts and Entertainment
Stir crazy: Noel Fielding in 'Luxury Comedy 2: Tales from Painted Hawaii'
comedyAs ‘Luxury Comedy’ returns, Noel Fielding on why mainstream success scares him and what the future holds for 'The Boosh'
Life and Style
Flow chart: Karl Landsteiner discovered blood types in 1900, yet scientists have still not come up with an explanation for their existence
lifeAll of us have one. Yet even now, it’s a matter of debate what they’re for
Arts and Entertainment
'Weird Al' Yankovic, or Alfred Matthew, at the 2014 Los Angeles Film Festival Screening of
musicHis latest video is an ode to good grammar. But what do our experts think he’s missed out?
Sport
New Real Madrid signing James Rodríguez with club president Florentino Perez
sportColombian World Cup star completes £63m move to Spain
Travel
Hotel Tour d’Auvergne in Paris launches pay-what-you-want
travelIt seems fraught with financial risk, but the policy has its benefits
Arts and Entertainment
booksThe best children's books for this summer
Life and Style
News to me: family events were recorded in the personal columns
techFamily events used to be marked in the personal columns. But now Facebook has usurped that
News
ebookA unique anthology of reporting and analysis of a crucial period of history
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

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

iJobs Job Widget
iJobs Money & Business

Programme Director - Conduct Risk - London

£850 - £950 per day: Orgtel: Programme Director - Conduct Risk - Banking - £85...

Business Analyst (Agile, SDLC, software)

£45000 - £50000 Per Annum + excellent benefits: Clearwater People Solutions Lt...

Finance Manager - Bank - Leeds - £300/day

£250 - £300 per day + competitive: Orgtel: Finance Manager - Accountant - Bank...

Compliance Officer - CF10, CF11, Compliance Oversight, AML, FX

£100000 - £120000 per annum + BONUS + BENEFITS: Harrington Starr: A leading fi...

Day In a Page

Noel Fielding's 'Luxury Comedy': A land of the outright bizarre

Noel Fielding's 'Luxury Comedy'

A land of the outright bizarre
What are the worst 'Word Crimes'?

What are the worst 'Word Crimes'?

‘Weird Al’ Yankovic's latest video is an ode to good grammar. But what do The Independent’s experts think he’s missed out?
Can Secret Cinema sell 80,000 'Back to the Future' tickets?

The worst kept secret in cinema

A cult movie event aims to immerse audiences of 80,000 in ‘Back to the Future’. But has it lost its magic?
Facebook: The new hatched, matched and dispatched

The new hatched, matched and dispatched

Family events used to be marked in the personal columns. But now Facebook has usurped the ‘Births, Deaths and Marriages’ announcements
Why do we have blood types?

Are you my type?

All of us have one but probably never wondered why. Yet even now, a century after blood types were discovered, it’s a matter of debate what they’re for
Honesty box hotels: You decide how much you pay

Honesty box hotels

Five hotels in Paris now allow guests to pay only what they think their stay was worth. It seems fraught with financial risk, but the honesty policy has its benefit
Commonwealth Games 2014: Why weight of pressure rests easy on Michael Jamieson’s shoulders

Michael Jamieson: Why weight of pressure rests easy on his shoulders

The Scottish swimmer is ready for ‘the biggest race of my life’ at the Commonwealth Games
Some are reformed drug addicts. Some are single mums. All are on benefits. But now these so-called 'scroungers’ are fighting back

The 'scroungers’ fight back

The welfare claimants battling to alter stereotypes
Amazing video shows Nasa 'flame extinguishment experiment' in action

Fireballs in space

Amazing video shows Nasa's 'flame extinguishment experiment' in action
A Bible for billionaires

A Bible for billionaires

Find out why America's richest men are reading John Brookes
Paranoid parenting is on the rise - and our children are suffering because of it

Paranoid parenting is on the rise

And our children are suffering because of it
For sale: Island where the Magna Carta was sealed

Magna Carta Island goes on sale

Yours for a cool £4m
Phone hacking scandal special report: The slide into crime at the 'News of the World'

The hacker's tale: the slide into crime at the 'News of the World'

Glenn Mulcaire was jailed for six months for intercepting phone messages. James Hanning tells his story in a new book. This is an extract
We flinch, but there are degrees of paedophilia

We flinch, but there are degrees of paedophilia

Child abusers are not all the same, yet the idea of treating them differently in relation to the severity of their crimes has somehow become controversial
The truth about conspiracy theories is that some require considering

The truth about conspiracy theories is that some require considering

For instance, did Isis kill the Israeli teenagers to trigger a war, asks Patrick Cockburn