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Top 10 ASX penny stocks for traders to watch

A brief examination of ASX penny stocks, their advantages and drawbacks, and a rundown of the 10 best penny stocks to watch in Australia this year.

ASX penny stocks: what you need to know

Penny stock investing requires a high degree of due diligence, as they represent smaller propositions that usually come with a far higher risk to reward ratio.

In the UK, a penny stock is defined as any share worth less than £1 each. In the US it’s any under US$5 (circa AUD$7).

In Australia, many classify penny stocks as those under one Australian dollar per share, while some use the definition loosely to describe any company with smaller share prices.

It’s also worth noting that penny stocks can have high-value market caps if large numbers of shares have been issued.

Top 10 best ASX penny stocks to watch in 2022

1) Minrex Resources (ASX: MRR)

Minrex is a gold and base metal exploration company, with access to four projects in East Pilbara and one at Gullewa. The company owns a 70% interest in its Pilbara projects.

Investors recently oversubscribed to Minrex’s $13.5 million placement, to accelerate its lithium-tin-tantalum exploration, including 25,000m of drilling in Pilbara. Significantly, this included a $6.8 million investment from a strategic group of Chinese and Australian mining groups, some of whom were seed investors in Global Lithium.

With many metals at multi-year highs, this ASX penny stock is well worth watching through 2022 as exploration continues.

2) Castle Minerals (ASX: CDT)

Castle Minerals also engages in metal exploration, with interests including gold, copper, zinc, lead, lithium and even graphite. The company operates in Western Australia but also has some projects in Ghana.

Its motto is ‘multiple options for multiple discoveries.’ And it’s taken that maxim to heart, after issuing 120 million new shares in January, raising $3.6 million to ‘boost Castle’s working capital to $6 million, placing the company on a stronger footing to accelerate work.’

However, it has a high level of cash burn and future placements further diluting current shares are possible.

3) Roto-Gro International (ASX: RGI)

This ASX penny stock aims to ‘redefine the future of agriculture.’ It designs and manufactures state-of-the-art technology that provides solutions to the indoor vertical farming niche. Its patented rotational gardening systems and automation tech produce industry yielding crop yields at lower operating costs. And the company offers full design, installation, and tech support services.

Roto-Gro recently received a CAD$1 million order from Canniberia to help cultivate medicinal cannabis in Portugal. This could be its foothold in the European cannabis market, which is expected to grow to €800 million by 2025.

4) MoneyMe (ASX: MME)

MoneyMe is an award-winning FinTech that uses artificial intelligence to approve personal loans of up to $50,000 in as little as 60 minutes. It also originates loans for debt consolidation, operates MoneyMe+, a shop now, pay later service for larger items, and Autopay for same-day car financing.

The penny stock recently bought out fellow lender SocietyOne for $132 million. And the sky could be the limit for expansion as the fintech revolution accelerates.

5) Splitit (ASX: SPT)

Splitit is shaking up Australia’s credit industry, allowing consumers to leverage existing credit more effectively. Its vision is to ‘be the leading provider of interest-free card based installment payment solutions for merchants and shoppers worldwide.’ And the penny stock is free of fees, application charges and credit checks.

The business plan appears to be working, with merchant sales volume up 112% in two years to US$396 million, and revenue up by 159% to US$11 million.

6) BrainChip (ASX: BRN)

Brainchip is ‘revolutionising Edge AI applications’ with its Akida hardware and software products. The penny stock is attempting to ‘deliver technology that has the capability to improve the human condition through our brain-inspired Neuromorphic AI infrastructure.’

The company’s novel approach to AI advancement makes it a one-of-a-kind proposition; it argues that creating chips that can think like a human mind is key to furthering AI, rather than making increasingly faster chips

Of course, success is by no means guaranteed.

7) Advanced Human Imaging (ASX: AHI)

This ASX penny stock specialises in scanning tech that captures human medical data using a smartphone. Its CompleteScan technology is embedded inside a partner’s app and utilises the phone’s sensors and cameras to scan the body. It’s also devised Dermascan, which can identify and assess 588 skin conditions, removing the need for traditional medical assessment.

The company’s mission is to deliver ‘an easy to use, early warning, and health assessment tool’ as the pandemic-induced cultural shift towards remote medicine gathers pace.

AHI has fallen by 90% over the past year, but its tech proposition makes it one to watch.

8) Superloop (ASX: SLC)

Superloop remains extremely volatile as the tech stock crunch continues. But this ASX penny stock is an independent ‘provider of connectivity services, designing, constructing, and operating networks throughout the Asia Pacific Metro region,’ including in Australia, Singapore, Hong Kong, the Pacific Islands and the USA.

Recently acquiring SubPartners, the company now owns more than 1,045 kilometres of fibre and 455 strategic sites, providing scalable high-performance connectivity solutions.

9) Paladin (ASX: PDN)

With a $2.4 billion market cap, Paladin is the largest penny stock on the ASX. The Australia-based company is a uranium miner and explorer and operates mining projects in both Australia and Namibia.

Its share price is up 1,000% over the past five years, as demand for the metal that powers nuclear stations continues to surge. At a record high, Uranium is soaring on the impact of recent geopolitical developments, as countries prioritise the security of renewable energy security over foreign-mined fossil fuels.

And with nuclear power generating 10% of global energy needs in 2021, this penny stock could rise even further in 2022.

10) PlaySide Studios (ASX: PLY)

PlaySide is the largest publicly listed video game developer in Australia. The company publishes games in its own right, as well as in collaboration with major studios including the likes of Disney, Warner Bros and Pixar. It operates games from franchises as diverse as the Walking Dead, Cars, and Jumanji.

Playside is also working on non-fungible tokens and Metaverse games, with a degree of success already. And with its 130 game creators having already developed over 50 games across mobile, virtual reality, augmented reality, and PC platforms, further growth seems likely.

How to trade or invest in ASX penny stocks

1. Learn more about ASX penny stocks
2. Find out how to trade or invest in ASX penny stocks
3. Open an account
4. Place your trade

You can open a position on ASX penny stocks either through share trading or derivatives trading. Share trading means that you take direct ownership of the stock. By comparison, derivatives trading – such as CFD trading – allows you to speculate on the price movement of a company’s shares without actually taking ownership of them.

For a complete breakdown of the benefits and drawbacks of each strategy, please click here.

ASX penny stocks: further important information

ASX penny stocks are often thinly traded. This means that unlike the blue-chip shares of the ASX 200, where every stock usually has a wall of potential buyers, there may not always be enough buyer demand when investors want to sell.

In addition, penny stocks are often loss-making, using any money available to invest in growth. This makes them highly speculative investments. Moreover, they usually receive little to no analyst coverage, making truly informed trading decisions difficult.

They can also even lack in-depth trading records. And some penny stocks are notorious for diluting stock value by issuing additional shares.

These risk factors mean that for most investors penny stocks should only form a small percentage of one’s portfolio. And for those closer to retirement who are investing over short timeframes, they arguably should be avoided altogether.

Of course, despite these significant risks, ASX penny stocks hold a unique advantage. The right pick can be massively more lucrative than an investment in more established peers.

However, it’s important to beware of the echo chamber of success. Skyrocketing penny stocks are extremely likely to hit mainstream news, but the success stories are significantly outnumbered by the failures. Moreover, once an ASX penny stock hits the headlines, it's often too late to partake in its success.

But many of the largest blue-chip stocks on the ASX began trading as penny stocks. For example, the largest stock on the ASX, BHP, used to be a penny stock back in 1999. Afterpay was a penny stock as recently as 2017. International market titans Apple and Amazon also once qualified as penny stocks for the investors with the foresight and luck to invest early.

However, even if an investor buys into a successful penny stock at an early stage, they can only experience the full financial benefit if they continue to retain their shareholding, even after it has doubled, tripled, or even exploded in value.

And psychologically, investors must also be confident that others will hold their shares, as it only takes relatively few sellers to depress a penny stock’s share price. This is complicated by the hallmark thin trading; a penny stock that has just doubled in price may not have enough buyers if too many are selling at the same time. This all requires extremely high conviction.

For this reason, an ASX penny stock must have a solid investment case that remains strong regardless of volatile share price movement. For example, this could include new technology, like Apple’s iPhone, a unique idea, such as Amazon’s approach to online shopping, or even something as banal as exclusive rights to a mining project.

But it’s also important to note the positives. When a company is small, it can be easier to grow quickly, while larger companies eventually reach a growth rate ceiling. And ASX penny stocks offer retail investors the ability to buy large numbers of shares for relatively little money.

This means an investor can benefit from the potentially rapid growth of a large number of penny shares across multiple sectors, whilst also keeping the high-risk investments as only a small percentage of their overall portfolio.

In the current economic environment, many penny stocks are struggling to access finance as investors flood to blue chips. Of course, this elevates the risk-reward ratio even higher, as some are now available at a discount compared to relative risk.

In summary, ASX penny stocks usually constitute highly risky investments with the potential to deliver supersized returns.

This information has been prepared by IG, a trading name of IG Australia Pty Ltd. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.

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