Beware of the Penny Share

I'm afraid I'm going to put on my Boring Old Fart hat for this column!

What I want to do is encourage you into good investment - not "exciting" penny share punting. You see, I got an e-mail from a 19-year-old who is obviously very intelligent and could end up being a good investor/trader.

But I despair when I read paragraphs like these (I have blanked out the two share codes he mentions):

"I have read much contradictory information on X and X across many of the message boards that you will undoubtedly be familiar with. Being 5% to 10% down on both reading this info begins to place doubts in my mind. I do, however, believe these are both potential ten bagger material. Could I have your views?"

"Oh boy…", I think to myself when I take a look at the two shares he mentions to find, of course, they are tiny illiquid penny shares that should not be touched with a bargepole. One of them had a spread of 13% - you lose 13% just by buying it! Both were high risk loss-making companies that could as easily go bust as go up.

You see, what my e-mailer and other youngsters who buy into these shares don't realise is that they are not investing or even trading - just gambling!! The words "ten bagger" is what really gets them going. Believe me it is highly unlikely to happen. The trouble is it all seems too exciting to buy a share at 4p hoping it will become 40p. True - it does happen occasionally. But for every one that makes it, ten go bust. You will simply lose money over time by buying rubbish, and that's all there is to it.

And all they need is a little encouragement from penny share pushers on the bulletin boards before buying something they haven't researched, and know nothing about, in the hope of getting a big quick return.

The other problem is youngsters, like my e-mailer, may have an initial bad experience, worry that they're losing money on them, and want reassurance from me which is not what he is getting! What I would really like him to do is get rid of the crap and concentrate on buying good quality dividend paying companies and invest his money properly!

You see - I told you this column was going to be old farty! Yes, I know how exciting it is to buy those little penny shares, but I promise you it will lead to the poorhouse. So just stop it if that's what you're doing.

Talking of decent high quality companies, they have been going up! Some decent returns recently from a few of my favourites include Burren Energy, Broker Network, Creston and Mouchel Parkman.

The recent market upswing seems to have taken a lot of commentators by surprise, as nearly all were making doomsday predictions. As we move into the summer months, I feel we are reasonably safe from very big sudden falls that occurred a while back, as the market rarely tumbles in August.

And congratulations to anyone who bought decent companies on some of the really bad days - a great strategy which will really have paid off.