Penny dreadfuls and share trading 101

By MARY HOLM

Q. I just caught the end of a TV news item about the school share trading competition. I'm sure they said that the winning girls made over 500 per cent in five months.

I'd like to know what their secret was, and I'm sure many of your readers would like more details as well.

Is there any chance of adding the results to your Saturday column?

A. Sort of.

The trouble is, the winning syndicates were all day traders, moving in and out of different shares frequently. Listing all their holdings would be boring to read and probably not very helpful.

But Michele Allison of the Stock Exchange, which runs the Stockmarket Challenge, says the winning teams invested largely in what are sometimes called Penny Dreadfuls, or low-priced shares.

These tend to be smaller, high-risk companies, perhaps in technology or mining.

If they suddenly strike oil or sign a big contract, it's not unusual for their share price to double, say, to 8c.

A few doublings every month, and $50,000 can, indeed, turn into $274,000 over five months, as happened for the winning Christchurch Girls' High syndicate. (By the way, that's a 448 per cent increase, not more than 500, but who's counting?)

Then again, it's also not unusual for things to go wrong and Penny Dreadful prices to halve.

One of the problems with the Stockmarket Challenge, long acknowledged by the Stock Exchange, is that the winners receive prizes but the losers don't actually lose anything.

There's every incentive, and no disincentive, to go for the riskiest strategy possible - which has got to be frequent trading in the most volatile shares.

The exchange does force students to reduce their risk by a degree of diversification. They are not allowed to put more than 30 per cent of their money in any one share, and must invest in three broad industry sectors.

Beyond that, though, it's Go for it! time.

Back in the real world, some people get very rich by doing that. Others get very poor.

In other ways, too, the game is unreal.

There is a brokerage charge of 0.5 per cent, with a minimum of $10. This is lower than brokers actually charge.

Allison says the exchange didn't want to stifle trading. But she thinks they will raise the brokerage next year.

And there's no provision for tax on capital gains. Real frequent traders would have to pay that tax, and that makes a big hole in returns.

Allison also says the pricing mechanism used, the mid-point between buy and sell prices, tends to encourage frequent trading and boost gains. That, too, will be changed next year.

All in all, then, I wouldn't recommend that you rush out and copy the winning girls.

As far as the challenge is concerned, I think it is great that it gets students interested in the sharemarket. I just hope that the exchange and teachers make it clear how the game differs from reality.

When you are using real money, broad diversification and buy and hold are still the best strategies for all but big risk-takers.

For those who didn't catch it earlier, Pakuranga College was national runner-up in the challenge.

Regional winners were: Central Auckland and Northland - Mt Roskill Grammar; West and South Auckland/Waikato - Hillcrest High School, Hamilton; Central North Island - New Plymouth Boys' High; Lower North Island - Hutt Valley High; and South Island - James Hargest High School, Invercargill.

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