How to Spot the Best Penny Shares in the UK in 2021

How to Spot the Best Penny Shares in the UK in 2021

As the financial market slowly recovers from the pandemic, there has been an increased demand for investment strategies that require low capital. Amongst the most preferred options in the UK, Penny shares take a leading position in the financial market.  

Altogether, it is prudent to engage one of the best trading platforms before investing your money in the stock exchange. Amazingly, these platforms link investors to reliable stock exchanges for their cryptocurrencies, forex, stock, or commodities.  

In this piece, we will take you through choosing the best Penny shares to buy UK 2021. Before we do that, here is a short description of the term Penny shares. 

What is Penny Shares?

Penny shares are widespread stock trade in the UK where individuals invest on less than £1. Given that they are low-valued ventures, Penny shares offer an elevated risk because the trading firms are usually small and inexperienced. Moreover, there is stiff competition with other prominent organizations in the industry.  

Regardless of the perils mentioned, the prospects of high returns entice millions of people to low-priced stocks. Fortunately, Penny stock concentrates more on the investor’s growth. Most impressive, you can find Penny stock listed on the AIM index (Alternative Investment Market).  

Like any other investment, it is critical to determine whether Penny shares are worth your coin. Follow imperative guidelines below destined to help you make a wise decision.  

1. Performance Ratios 

In almost every organization, some performances ratios help determine the returns made. Mainly, this touches on the ROI (Return on Investment) and ROE (Return on Equity). In addition, performance ratios check on the operating profit, net profit, and gross profit margins.  

Unfortunately, Penny shares profits usually start on the lower side. For this reason, check the reliability and stability of an organization before making any investment.  

2. Liquidity Ratios 

Liquidity ratios estimate an organization’s capability to repay long and short-term obligations. It is not always easy for an investor to calculate the liquidity ratios. Nonetheless, start evaluating with capital ratio, current ratio, cash flow ratio, and quick ratio.  

Bear in mind that most Penny stocks struggle to pay short-term obligations promptly. That said, a low liquidity level of not more than 0.5 indicates that an organization is struggling to remain afloat.  

3. Leverage Ratios 

Compared to the liquidity ratios, leverage ratios checks on a firm’s capacity to pay off their long term debts. The bottom line is to check whether the debt reduces or increases in the long run. Remember that shrinking loans encourage growth opportunities and promote corporate expansions.  

Before settling on any Penny stock, it is essential to check on the interest coverage ratio. This helps to determine if the brand makes enough profit to repay its loans. It is worth noting that high-interest rates are an indication of a thriving organization. On the other hand, the low rates below depict potential challenges in paying back loans. 

4. Valuation Ratios 

Valuation ratios verify whether specific security is expensive or cheap when evaluated with particular measures like project value or profits. The main idea behind valuation ratios is to find out an organization’s stock attracting power compared to the current price. In most cases, companies overvalue their Penny stocks which can be misleading to investors. Determining the actual Penny stock worth can be a significant challenge.  

Despite all, check on the P/E (Price to earnings) ratio to avoid burning your fingers in the financial market. Primarily, Price to earnings demonstrates the union between revenues and cost per share. This is also referred to as the profit or net income minus the taxes and operating costs. 

5. Market Value Ratios 

Investors use market value ratios to estimate a company’s share price stock. Usually, this is determined by dividing annual total dividends by the stock’s current market price. In other words, this is an ROI to investors if they buy their shares at the latest market price.  

Currently, the safest market value ratios should not be less than 2:0. Ideally, higher rates than 2:0 display stability and prominence.  

6. Inventory proceeds Ratio 

An inventory proceeds ratio differs in various industries. Generally, the ratio determines business effectiveness in manufacturing and promoting products. For instance, a vehicle manufacturer has a much lower inventory ratio compared to fast food joint. Therefore, compare the ratio depending on the industry involved. Also, use the ratio in comparison or contrast to the current competition. 

7. Quick Ratio 

Quick ratios focus on liquid assets like cash, stock exchange investments, and marketable securities. These are assets that investors can easily convert into cash. You can divide the organization’s liquid assets with current liabilities to track down the quick ratio. Preferably, settle for Penny share with a quick ratio of not less than 1:0. 

Final Thoughts

Similar to other investments, Penny shares trading has its shares of ups and downs. There are several factors that investors need to comprehend before plunging into the stock pool. The secret behind successful Penny stock investment is to weigh the risks and potentials first.