There has been a lot of nervousness in stock markets recently. Some investors worry about the potential for a stock market crash, while others reckon the FTSE 100 could be about to reach new highs. One corner of the investment world that has attracted attention in recent years is penny shares. But US penny stocks have seen trading activity tumble. What might that mean for penny shares on this side of the Atlantic?
Falling trading
The news comes from US watchdog FINRA, which reports that trading levels in unlisted US shares have fallen by 70% since activity peaked last year.
Such shares are a bit different to UK penny shares, which are listed on the stock market. But some of the dynamics behind lower activity levels could apply on both sides of the pond. Last year, the meme stock craze saw speculators frantically trade in and out of shares that in some cases they barely understood. Now many such speculators have lost interest in the market and stopped trading.
Speculation versus investment
As an investor with a long-term horizon rather than a speculator, I had no interest in being part of the meme stock craze. But I do hold some penny shares in my portfolio, including boohoo, Centrica, and Stagecoach. If investors lose interest in penny shares, could that lead to their prices crashing?
Stock markets depend on matching buyers with sellers. If the number of buyers falls, that can lead to share prices falling. But it does not always work like that. Sometimes, if demand from buyers weakens, shareholders just decide to hold onto their stocks rather than offering them for sale at a lower price. So, I do not see a penny stock crash as inevitable even if buyers decline in number.
Penny shares and value
A lot of people focus on the price of penny shares. That is understandable, as they are defined by their price. But price alone is never a reason to buy a share in my view. A share is a tiny sliver of a company. When I am buying shares, at any price, I am hoping to get more value in future than what I pay now.
To deliver that value, a company needs to have ways of generating profits. If it can do that at the right level and over a long period of time, I would likely see potential value in a share. So, although I may consider adding a penny share to my portfolio, my reason to do so would not be just because it trades in pennies. Instead, as with any other share, my reason would be that I felt the share offered me good value compared to its long-term potential.
How I would treat any penny share crash
That is why, if penny shares did crash, I would treat it the same way as a wider stock market crash.
I would look to see whether any companies I thought had strong future cash generation prospects were now available at a price I felt made them good value. If they did, I would consider adding them to my portfolio. Whether a penny share or any other kind of share, my approach is the same. I want to find high-quality companies trading at prices that offer me value.
The post Could penny shares be about to crash? appeared first on The Motley Fool UK.
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Christopher Ruane owns shares in Centrica, Stagecoach and boohoo group. The Motley Fool UK has recommended boohoo group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
