Penny stocks are an inexpensive way to diversify your investments and could multiply over time. But they’re also very risky investments because the companies are usually small, unestablished and fighting an uphill battle competing against other companies in their market. And yet, who doesn’t like an underdog?
“Penny stocks” is a loose term to mean cheap, low-priced shares of small, often newly-listed companies. Investors are often attracted to penny stocks for their cheap prices with the hope that they have the potential to grow significantly, although there are risks involved.
The definition can vary between countries. Despite the name, you won’t typically acquire a penny stock for as little as 1p. In the UK, a penny stock is typically one that trades below £1. Meanwhile, in the US, a penny stock is one that trades for less than $5 per share. In some cases, a penny stock may slightly exceed these values if the company’s overall market cap falls below a certain level.
Some of the typical characteristics of a penny stock include:
Yes, you can buy and sell penny stocks in the UK. Typically, they’ll be listed on the AIM market – a sub-market of the London Stock Exchange where small and medium-sized growth companies find their home. The main market of the London Stock Exchange is typically reserved for larger, better-established companies.
Here’s how to invest in penny stocks in the UK:
Quite a few of the UK’s share dealing platforms offer penny stocks. A good starting point is our table of share trading platforms further down this page. If there are particular penny stocks you’re interested in, make sure that your chosen platform offers them before signing up.
In comparison with penny stocks, blue-chip stocks are large listed companies that have been around for a long time and have a solid financial track record. While penny stocks, in most cases, pay no dividends, blue-chip stocks almost always do. Because they are (comparatively) stable and lower-risk, blue-chip stocks are typically in higher demand and can afford to levy a premium.
Penny stocks, on the other hand, are more likely to be in tiny companies you’ve never heard of. They need to offer competitive rates to persuade you to take a punt on them.
Typically, yes. The types of companies that use penny stocks are usually newer, smaller companies with limited resources and little track record of delivering. While the potential for growth of such companies is high, the potential for failure is also high. So the value of penny stocks may shoot up…or it may crash through the floor. This may not be a linear pattern either. It’s likely that internal and external factors will affect the performance of a penny stock company more than a larger company with more contingency built in.
In short, buyers of penny stocks need to be prepared for the risk that they may lose everything on their investment.
It’s possible, yes. Some of the world’s biggest companies – such as Apple – once traded in penny stocks. If you’d got in on the act in Apple’s early days, you’d be pretty chuffed with yourself now.
But for every huge success, many more penny stocks fail completely. So there’s no guarantee that the penny stocks you invest in will become regular stocks – or even continue to exist at all.
You could consider investing in penny stocks if you’re looking for a cheap investment, and:
If you’re tempted by penny stocks primarily because of their low price, then it might be worth considering alternative cheap investments. After all, if a stock ends up worth nothing, then you’ve still lost 100% of your initial investment, regardless of how cheap it was to start with.
If you’re keen to invest in the stock market but don’t have enough money to buy many full shares in big companies, there are a couple of lower-cost alternatives:
There are a few advantages to investing in penny stocks. First, they’re cheap. You can pick up a fair amount of shares in a company for not very much money. This could be tempting for those without much money to invest. (But read the main downsides of penny stocks before you get too excited.) Secondly, they offer the chance of making you a mountain of cash if that little minnow of a company turns out to be the next Apple or Amazon. Plus, if you’re feeling more altruistic, penny stocks do give shiny new companies a way of raising funds without which they wouldn’t have a hope of succeeding.
Penny stocks can also be exciting territory for day traders, who are more likely to relish the opportunity for profit that penny stock volatility can offer. This is territory best trodden by experienced and knowledgeable investors, though, as it’s all too easy to time things badly and make substantial losses.
Well, there’s a reason that penny stocks are so cheap – it’s all too easy for minnows to lose their way in the pressured and crowded journey upstream. That high volatility we mention above means there’s a pretty high chance that, even with legitimate companies, you’ll lose money on your investments, and a high number of penny stock companies fail completely. The penny stock arena can also be the territory of scammers looking to make a quick buck off of your desire to, well, make a quick buck.
Both of these factors mean you should always proceed with caution before buying any penny stock.
It’s possible, but you’d have to either know exactly what you’re doing or get extremely lucky. If you see a small company that looks like it’ll soar and you like what it’s doing, you can invest with the hope that it will. If it does soar, then you can make a big profit, if not, you won’t.
Penny stocks are typically worth less than £1 (or thereabouts) in the UK or less than $5 in the US. So, if you only buy a single share, technically, you only need to spend this much. You’re unlikely to strike it rich on this basis, though, even if the company is wildly successful. Plus, you’d need to choose a share dealing platform that permits a low minimum investment level. There are plenty that have a minimum investment of £10 or less.
Stocks themselves aren’t regulated per se. Instead, the UK’s Financial Conduct Authority (FCA) regulates financial services markets, including exchanges, brokers and share dealing platforms and investment platforms and brokers.
However, it is fair to say that penny stocks traded on the AIM market have fewer restrictions than stocks traded on the Main Market of the London Stock Exchange.
To be listed on the Main Market, a company:
AIM stocks don’t have any of these requirements. This is one of the factors that makes them inherently risky.
Penny stocks are very different from ordinary shares and need to be treated with a healthy dose of educated caution. Follow these tips to maximise your chances of success.
This is important for all investments, but particularly higher-risk investments such as penny stocks. Blue-chip stocks are, by their nature, lower-risk options as they have a long history of strong financial performance.
Before you start buying, decide which penny stocks you’re going to invest in and how much you’re going to invest in each one. Also, decide what price you’d sell at if the shares were to fall. Stick to your investment strategy guns if this does happen to avoid the “I’ll just hold a little longer and see if the price jumps back up” mentality. The same applies to gains.
It can be easy to get emotionally attached to a penny stock, as they’re often the underdogs in your stock portfolio. So when their share price falls and falls some more, you can find yourself making excuses as to why you should keep holding. This is why it’s important to make and adhere to a strategy, so you leave the emotions out of it.
Penny stocks may appear cheap compared to other shares listed on the LSE but don’t base your investment decision purely on this. One factor that influences a company’s share price is the demand for its shares. The less demand from investors, the lower the share price. So, some penny stocks may appear to be cheap, but you need to ask yourself why.
Here are some of the benefits and risks of investing in small-cap UK penny stocks:
All investing should be regarded as longer term. The value of your investments can go up and down, and you may get back less than you invest. Past performance is no guarantee of future results. If you’re not sure which investments are right for you, please seek out a financial adviser. Capital at risk.
Penny stocks, with their low cost and high potential returns, can add a dash of excitement to your investment portfolio. They carry significant risk, though. The possibility of losing your entire investment isn’t just theoretical—it’s a very real risk. It’s essential that penny stocks don’t make up the majority of your portfolio. Diversification is key, and it’s crucial to only invest money you’re fully prepared to lose.
Do your homework. Investigate if these stocks are truly undervalued with strong potential for future growth or if they’re low priced for a reason. Look out for red flags such as limited transparency or sudden promotions. Be wary of “pump and dump” scams, where fraudulent actors manipulate stock prices.
Keep in mind that penny stocks are common in volatile sectors like biotech or mining. The allure of high potential doesn’t guarantee success, so scrutinise each company individually.
In comparison, the FTSE 100, comprising large established companies, can offer steadier price changes and regular dividend payouts of about 3.9% each year. The FTSE AIM 100, made up of smaller and often younger companies, can at times outshine the FTSE 100 in returns, but it can also underperform severely, such as during the massive sell-off of 2022, and pays smaller dividends of around 2%. So, choose wisely, and always do your research.
All investing should be regarded as longer term. The value of your investments can go up and down, and you may get back less than you invest. Past performance is no guarantee of future results. If you’re not sure which investments are right for you, please seek out a financial adviser. Capital at risk.
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