"You invest in penny shares? what are you thinking?"

"You invest in penny shares? What are you thinking? "

The 1980 research study no one tells you about
Unless you read up on investing theory you've probably never heard about a study done by Rolf W Banz in 1980, "the relationship between return and market value of common stocks."

This study looked at shares between 1936 and 1977 to establish whether there was a link between the size of companies and the money investors could make from their shares.

The study concludes, "On average, small NYSE firms have had significantly larger risk adjusted returns than large NYSE firms over a forty year period. This size effect is not linear in the market proportion but is most pronounced or the smallest firms in the sample."

So, small companies perform better than big ones. And, the smaller they are the more likely they are to make bigger returns.

Proven to outperform bigger shares
"So when I say small cap shares aren't that risky, or that they're the best class of shares for large returns from the stock market it isn't my opinion it is a fact."

Rolf Banz isn't the only researcher to prove this. In a paper called "Dimensions of popularity", Roger Ibboston and Thomas Idzorek test this theory as well. They sort the universe of stocks by popularity, as defined by share turnover, and dividing them into quartiles each year from 1972 through 2013. They find that stocks in the Lowest quartile of share turnover the least popular stocks (and smallest) outperformed the highest quartile by more than seven percentage points per year over the period studied.

Since 2005, the top 40 index climbed 393%(the top 40 index tracks the 40 largest blue ship shares listed on the JSE). Meanwhile (the small cap index tracks smaller companies, many of which are penny shares).

Yet you don't hear about this in the media. You don't see the small Cap ETFs or scores of small Cap unit trusts. Many 'salesman' will actually warn you against small caps as excessively risky. Rather advising you to invest in slower growing large cap shares.

So why isn't everyone investing in small caps?
If penny shares are so great, you'd expect everyone to harness their amazing profit building potential and get rich. 

But that's not the case at all! 
You see penny shares penny shares are so small, the big fund managers can't trade them. This is because big investment firms have billions to invest. But if the company they buy into is a penny share, its worth only a couple hundred million. These big funds wouldn't be able to buy a meaningful amount of these shares without the price shooting through the roof with a big order.

This immediately cuts into their potential profits, so a penny share just isn't a sensible way to play the market, when you're a big boy. However they're great for the little guy and first time investors! But because the "big boys" ignore them, the mainstream media does too.