Should You Invest in Penny Shares?

Lucy Miller 9th Aug 2020 One Comment

Reading Time: 5 minutes

If you’re looking to invest in shares, you might not know where to start. How much should you invest, if you’re a beginner in this area? What platforms should you use to manage your investments? If you’re wondering about these questions, this might be a good time to introduce yourself to “penny shares” – essentially, shares that are low cost but are still widely available to buy.

So, what does the term “penny shares” even mean? In this article, we’ll do our best to answer that question. We’ll briefly outline what penny shares are, before explaining where you can find them, how to invest in them, and how you can understand the risks and benefits involved.

What Are Penny Shares?
Where to Find Penny Shares
How to Invest in Penny Shares
Understanding the Risks
What Are the Potential Advantages?
Other Places to Invest Your Money

What are penny shares?

Firstly, a quick definition of what penny shares actually are. To break it down, they are shares that trade for less than £1 (in the UK) or less than $5 (in the US). So no, they don’t trade for literally a penny!

Often, penny stocks are so-called because the companies involved aren’t fully established yet, therefore pose a relatively high risk to the investor. There is potential for reward though, too. Companies including Ford, JD Sports and Monster (of energy drink fame) once traded for less than £1 per share. Those that invested in companies such as these in the early days are, of course, reaping the benefits now.

Where to find penny shares

So, where might you track down shares in these kinds of companies? Due to the nature of their businesses, these small shares are more often than not traded outside the major markets.

In the UK, you are likely to find them “traded on small-cap indexes such as the FTSE Small Cap or the AIM All-Share”, according to SyndicateRoom. You can see all the FTSE indices listed on the London Stock Exchange website. The AIM All-Share can also be viewed on the London Stock Exchange site.

Penny shares are available through most online brokerages. The best way to find them is to search for the ticker on the brokerages’ website and view available trading options.

How to invest in penny shares

Before you invest in penny shares you need to fully understand what they are, as well as which companies might be the best to invest in. You’ll need to spend some time researching in order to get this right. You don’t want to jump in without having done your homework. That’s a sure-fire way to lose your money very, very quickly.

Once you’re sure about which companies you want to invest in, and by how much, you’ll need to decide which platform you’re going to use to manage your investment. Various trading accounts or brokers will have different specialisations, so some may be more suited to your purposes than others.

Make sure you pay particular attention to the platform’s fee structure, and how much commission they are likely to take on your investments. There is more information on this available on Investopedia.

Once you’ve created an account and set yourself up on a platform of choice, you’re ready to start trading!

To find penny shares, simply search for the relevant ticker symbol. You will then be able to view available information about the share to decide whether or not it is a good investment opportunity.

Understanding risks of penny shares

Of course, there are both risks and advantages to investing in penny shares. One of the most common warnings is that many penny shares will inevitably fail. This is down to the companies being relatively new, insecure and/or unproven. Penny shares are volatile, and are often at the mercy of unstable markets. Often, the businesses that they pertain to are untested in the market and offer no real guarantee of success. Things can also move very quickly, meaning they are liable to fail overnight.

There is also the issue of fundraising. Whilst companies might raise capital through investment, this will devalue their shares, meaning your investment could end up being worth less. Obviously, this is less than ideal.

All of this obviously adds up to a significant level of risk – the same level of risk that would be associated with any new business or product.

What are the potential advantages?

Of course, these risks can end up paying off hugely too… see the aforementioned JD Sports, Ford and Monster. If you have a small amount to invest, penny shares can be a great way in and a great introduction to investing, that doesn’t risk a huge amount of capital. Penny shares are open to anyone who wants to invest, making them a very democratic part of the stock market.

Other places to invest your money

Of course, if you think that penny shares are too much of a risk there are numerous other places that you could invest your money. Here are just a few suggestions to consider…

In shares in a more established company, for example one that is listed on the FTSE 250, that has a much lower risk of failure
In a high interest ISA, if you want to have almost no risk at all (see here for for details on types of ISA, including stocks and shares, lifetime, innovative finance and cash)
In your pension pot (and maybe consider whether you want to move to a higher risk scheme in order to see a greater return by the time you need it)
In art, rare instruments, precious metals or property, the value of which is always likely to rise
In bonds

We hope this article has given you at least a small introduction to penny shares and whether they might be an option for you. Remember, our most important piece of advice is to always do your research before you make an investment. Your bank account will thank you in the long (and maybe even in the short) term.

Have you invested in penny shares? We’d love to hear from you, whether your story is positive or not. Let us know over on the forums…