Teen Finance: Penny Stocks for your (Junior) ISA

Investing does not have to be a game of tens of thousands of pounds and putting even small sums to work can be effective, fun and lucrative.

If you have £2,000 saved up in an Isa or Junior Isa, how can you invest that money best? You can consider buying stocks that have a very low nominal value, sometimes called penny stocks – as you can afford more of those. Penny stocks are stocks that are literally worth pennies or cents, meaning these stocks trade below the value of £1. Penny stocks allow us to buy thousands of shares and even the smallest move in the share price can give an immediate gain or loss.

Penny stocks: growth types

A good example of a growth penny stock (I have it in my Junior ISA) is Agronomics (ticker ANIC.L). Agronomics is an investment company that has various holdings in companies that make lab-grown foods, such as (fake) meat, tuna and eggs. Most of their investments are in fast-growing companies with well-known and well-liked products, such as Mosa Meat burgers and Blue Nalu. The alternative protein market is a growing industry and Agronomics is well positioned to profit from this. Agronomics trades at £0.21p, meaning £2,000 can buy you 9,504 shares + the £3.95 trading fee, bringing your total sum invested to £1,999.79. Even 1 penny added to the share price, could net you £95,04 in tax free returns (9504 shares x £0.01).

This is a return of 4.75% on your investment (£95.04/£1,999.98) x 100.

Penny stocks: value & dividend types

Companies that have mature businesses with steady and stable growth often only can attract shareholders because they pay part of the cash that is generated by the business back to shareholders in the form of dividends. An example of a penny stock with a very good dividend is Lloyds Bank (ticker: LLOY.L). Although this is a rather unexciting business with an almost stationary share price, its price is a reasonable 5.88 times earnings per share (PE) and it pays a very good cash dividend. Lloyds now trades at £0.4412 per share and its 2021 dividend was £0.02 a share.

With £2,000 you can buy 4500 shares, which will cost £1,985 + £3.95 trade fee + (in this case) a 0.5% stamp duty on the shares ad £9.92, totalling your expense at £1,998.87. With a £0.02 dividend, you receive 4500x£0.02=£90, which is beats receiving nothing for keeping your money in cash any day.

This is a return of 4.50% on your investment (£90/£1,998.87) x 100.

The beaten down stocks

The beaten down set are stocks that have sold off because of the pandemic (and are yet to recover) or because they have fallen out of favour. Some of them are hovering just above penny stock status. But sometimes the ‘fall’ in the share price is overdone (the stock is oversold) and there might be a buying opportunity. A beaten down stock I have in my Junior ISA is British Airways (IAG.LSE). The share is down a lot, despite travel resuming at speed after the pandemic. Recent staff shortages at BA, cancelled flights and the war in Ukraine have taken a shot at the share price, which is only £1.34 now. Investing £2,000 in BA shares gets you 1480 shares at a cost of £1,983.20 + 0.5% stamp duty of £9.91 + £3.95 fixed fees, i.e. your investment totals £1997.06. Even if the BA share price (they are cash strapped so no dividends are paid) would only go to 25% of its pre-pandemic value, the price could rise to £2 a share, which would be an enormous windfall of 976.80.

In that case you would make a return of 48.9% (976.80/1,997.11) x 100.

Investing is risky and you could lose all your money. Keeping a calm head, keeping an eye on the stock market and following the news of ‘your’ companies will be necessary. But it will be fun too as investing teaches you about money, the economy and business. And leaving your money in cash today means it will lose value at the net inflation rate of about 7%, reducing your £2,000 investment to about £1860 next year. In the market they call this TINA, aka There Is No Alternative. Decisions, decisions…..

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