Are there penny stocks on the ASX?

There are a number of names that people have created for different categories of ASX shares. For example, ASX dividend shares, defensive ASX shares, blue-chip ASX shares and so on. Another term, which is mostly used in the US, is ‘penny stocks’. Are there penny stocks on the ASX?

What are penny stocks?

It’s all about the share price.

Some businesses have very high share prices. For example, the CSL Limited (ASX: CSL) share price is currently around $280. That’s definitely not a penny stock.

But, the generally accepted definition of a penny stock these days is a business that has a share price under $5. It used to refer to businesses where the share price was just measured in pennies, but it seems there has been a bit of inflation in the definition here.

Typically, a business with a low share price is one with a small market capitalisation.

Blue chips are usually described as among the biggest on the share market, with very entrenched brands.

Small cap ASX shares may have a market cap of less than $2 billion. Microcap ASX shares typically have market caps under $300 million.

But, a share price doesn’t necessarily tell an investor how big a business is.

For example, Sayona Mining Ltd (ASX: SYA) has a share price of around 25 cents, yet its market cap is just over $2 billion according to the ASX.

The Telstra Corporation Ltd (ASX: TLS) share price is currently sitting at $3.96, under the $5 level. But it has a market cap of $45 billion.

But then there’s a name like Lycopodium Ltd (ASX: LYL) which has a share price of well over $6, yet its market cap currently sits at $259 million.

Why are things so different?

It depends on how many shares each business has. If a business worth $100 million had 10 shares, each share would be worth $10 million.

But, if that $100 million company had 100 million shares, then the share price would be just $1.

Are penny stocks good ASX investments?

It really depends on the business.

Some ‘penny stocks’ go on to become large businesses such as Pilbara Minerals Ltd (ASX: PLS), Northern Star Resources Ltd (ASX: NST) and Altium Limited (ASX: ALU).

But, plenty of others don’t go on to achieve anything. Perhaps that business is a mining explorer that burnt through all its cash and decided to close.

Others may take a slow and steady approach to growing. Simply going from $50 million to $100 million is a doubling of the company size, which I think is an impressive return.

That’s the kind of thing that investors are thinking about with ASX penny stocks – they’re small, so maybe they have plenty of growth potential.

Being small doesn’t automatically mean they will grow a lot though. But, if they are good enough, it’s worth pointing out that it’s easier to grow from $100 million to $200 million than it is to go from $10 billion to $20 billion.

But, I’d prefer to go for small ASX shares that already have a proven business model or service, and they’re simply quite early on with their growth journey. I think this approach could lower the risk of a total wipeout for an investor.

The post Are there penny stocks on the ASX? appeared first on The Motley Fool Australia.

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More reading

• Are CSL shares a good buy right now?
• 5 things to watch on the ASX 200 on Wednesday
• Why did ASX lithium shares smash the market on Tuesday?
• Why did the Pilbara Minerals share price have such a cracker day?
• Here are the top 10 ASX 200 shares today  

Motley Fool contributor Tristan Harrison has positions in Altium. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Altium and CSL Ltd. The Motley Fool Australia has positions in and has recommended Telstra Corporation Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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