The Stocks and Shares ISA deadline is fast approaching. Investors have until the 5 April to use their £20k contribution allowance for the year (although once the money is in the ISA there’s no rush to invest). And due to the tax-efficient qualities of these wrappers, they could be the perfect vehicle to own penny stocks.
Stocks and Shares ISA benefits
Any income or capital gains earned on investments held inside an ISA is not subject to tax. That makes these products well suited for investing in high growth or dividend stocks. However, there’s no one-size-fits-all approach to investing. So investors should always consider their own personal position before buying any investment.
Penny stocks can be particularly appealing because some have the potential to generate significant capital gains. Unfortunately, it’s tough to pick winners. Many more investors lose money buying penny stocks than earn substantial profits in the long run.
Still, I’m comfortable with the level of risk involved in buying these businesses. With that being the case, here are five penny stocks I would buy for my Stocks and Shares ISA today.
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Penny stocks to buy
The definition of a penny stock is quite broad, which means that a business with market values of several hundred million pounds could qualify.
For example, shares in builders merchant SIG are changing hands for a little under 40p. That technically makes the business a penny stock. However, its market capitalisation is £457m. I would buy SIG as a way to invest in the UK economic recovery over the next few years.
As the economy recovers from the pandemic, I think the firm’s profits could start to grow, and that could translate into capital gains. Another company I’d buy in a Stocks and Shares ISA to play this theme is Severfield. This steelwork business could see sales increase if construction activity rises in an economic upswing.
The big risk here for both SIG and Severfield is that the economy does not return to health. That could set the recovery at both businesses back substantially.
Renewi and Empiric Student Property are two other penny stocks with large market caps. I would buy Renewi as I believe demand for the firm’s waste to energy business should increase as the world moves towards a more sustainable future. Meanwhile, Empiric Student could provide investors with a steady income from student property.
The most considerable risk both of these companies face is debt. The two firms have elevated levels of borrowing, which could limit their growth prospects as we advance. Other risks and challenges include regulation, which could increase Renewi and Empiric’s costs, pushing down profit margins. Still, as penny stocks go, I think these could be great additions to my Stocks and Shares ISA.
Finally, Pendragon is on my list of penny stocks to buy. The automotive retail has struggled over the past 12 months, but rising consumer confidence could translate into higher sales going forward. The group’s main challenges are its debt and the risk the recovery may not live up to expectations.
I’ve comfortable with these risks. That’s why I’d buy the stock for my portfolio today.
The post 5 penny stocks to buy for a Stocks and Shares ISA appeared first on The Motley Fool UK.
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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has recommended Pendragon. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2021