The attract of a penny inventory could be intoxicating for some novice traders. Usually, the low price per share provides the phantasm of affordability, making it simpler for people with restricted capital to speculate.

In different phrases, an investor with £200 may favor to purchase 1,000 shares of a 20p inventory relatively than 2 shares of a FTSE 100 inventory that’s buying and selling for £100. They could equate a low share price (20p) with being ‘cheap’, and a excessive price (£100) with being ‘expensive’.

Nonetheless, judging a inventory based mostly on price alone is a standard pitfall that traders ought to keep away from.

Give attention to fundamentals

An organization’s market cap is calculated by multiplying its share price by its shares excellent.

For instance, Lloyds‘ share price is 54p. Yet it’s actually no penny inventory. In reality, with a hefty £33bn market cap, it’s the Twentieth-largest agency listed in London. All this tells us is that the financial institution has an enormous variety of shares knocking about (round 60bn in reality).

In distinction, Judges Scientific is a small AIM-listed firm specialising in scientific devices. Regardless of having only a £577m market cap, making Lloyds roughly 57 occasions bigger, Judges Scientific’s share price is 8,700p (£87). There are far fewer shares.

On this case, an investor with £200 can both purchase 370 shares of Lloyds or 2 shares of Judges Scientific (costing £174). Nonetheless, what actually issues is the underlying enterprise, its progress potential, and prospects for future income — not whether or not the share price seems excessive or low.

Valuation

Subsequent, valuation is essential to contemplate. As Warren Buffett says: “Price is what you pay, value is what you get.”

A 20p inventory may finish up eye-wateringly costly (a horrible funding), whereas the £100 inventory might show to be an absolute steal. And vice versa.

An affordable UK small-cap

I’ve a 19p small-cap inventory in my very own portfolio. It’s known as hVIVO (LSE: HVO). The £133m agency is a pacesetter within the testing of infectious ailments utilizing human problem research. That is the place wholesome volunteers are contaminated with a pathogen to check illness development and the effectiveness of a possible remedy.

hVIVO has its personal state-of-the-art quarantine facility and recruits volunteers via its FluCamp platform. It really works with 4 of the highest 10 world pharmaceutical firms and is rising properly.

Sadly, the share price has slumped 34% since mid-November (though it’s nonetheless up 285% in 5 years). The primary cause for this hammering seems to be Donald Trump’s nomination of vaccine-sceptic Robert Kennedy Jr to steer the Division of Well being and Human Companies.

The danger right here is that his appointment might result in much less funding for vaccine research and growth, doubtlessly impacting hVIVO’s progress trajectory.

Nonetheless, that is hypothesis and Kennedy won’t even get the job. On 17 December, vaccine large Pfizer mentioned it doesn’t anticipate any main coverage adjustments round vaccinations in 2025.

In the meantime, hVIVO lately signed an £11.5m contract with a top-tier pharma shopper to check an antiviral for respiratory syncytial virus (RSV). It additionally reaffirmed full-year income steering of £62m, and is focusing on £100m by 2028.

After this hunch, the inventory is buying and selling on a ahead price-to-earnings (P/E) ratio of simply 11.7. That appears very low cost to me, which is why I’ll be snapping up just a few extra shares in January.