How to buy penny stocks in the UK | Are penny stocks worth it? - Finder UK (2024)

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?

What are penny stocks?

“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:

• Small company
• Market cap below £100m
• Newer company recently listed
• Low share price
• Limited financial track record
• Doesn’t pay dividends

Can you trade penny stocks in the UK?

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.

How can I invest in penny stocks in the UK

Here’s how to invest in penny stocks in the UK:

1. Choose a share trading platform. If you’re a beginner, our table can help you choose.
2. Open your account. You’ll need to verify your identity when you sign up.
3. Fund your account. You’ll typically be able to use a bank transfer to send money to your trading account.
4. Find the shares you want to buy. Search the platform for the shares you want and then click “Buy”.

What platforms offer 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.

Why are penny stocks cheaper than blue-chip stocks?

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.

Are penny stocks more volatile than other stocks?

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.

Can penny stocks become regular stocks?

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.

Are penny stocks worth investing in?

You could consider investing in penny stocks if you’re looking for a cheap investment, and:

• You have a high risk tolerance.
• You’re an experienced investor.
• You’re willing to cut your losses if the share price falls significantly.
• You have a long investment time frame and are willing to ride out the market volatility.
• You’re happy to take a bit of a “gamble”.

What are the alternatives to penny stocks?

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:

• Fractional shares. When you buy shares in a company, you buy a little slice of it. A fractional share is a slice of a slice of company pie. The original slice was the “share”, but if you cut that slice in half, you have 2 fractional shares instead. Technically, there’s no limit to how many splits you can make. An increasing number of share dealing platforms offer fractional shares as a way to give investors with lower funds access to stocks they wouldn’t be able to afford otherwise.
• Index funds or ETFs. These 2 types of funds work slightly differently in how they’re traded. But both types of funds track stock market indices – such as the FTSE 100. By investing in one of these funds, you’ll get exposure to all of the companies in the underlying index in one fell swoop.

What are the main advantages of investing in penny stocks?

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.

What are the main downsides of investing in penny stocks?

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.

Can you make money on penny stocks?

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.

How much do you need to start investing in penny stocks?

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.

Are penny stocks regulated?

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:

• Must have existed for at least 3 years
• Must have a market cap of at least £30,000,000
• Must have enough working capital for at least one year of trading
• Must be willing to float at least 10% of its share capital.

AIM stocks don’t have any of these requirements. This is one of the factors that makes them inherently risky.

Pros and cons of penny stocks

Here are some of the benefits and risks of investing in small-cap UK penny stocks:

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Table: sorted by promoted deals first

Bottom line

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.

Frequently asked questions

• Sorry, peeps, that’s one we can’t answer. Not only do we lack a crystal ball to see which penny stocks will turn into future Apples, but if we tried to make recommendations, we’d be dangerously close to giving financial advice (and that’s something only regulated professionals can do). So, we reckon the best penny stock for you is a purely personal choice and should be based on careful research and analysis, combined perhaps with a little bit of personal preference or admiration for a particular underdog.

• Yep. They’re stocks typically valued at less than £1 and usually traded on the AIM submarket of the London Stock Exchange.

• The highest that a penny stock can go and officially remain a penny stock is around £1 in the UK or $5 in the US. That doesn’t mean the stock can’t exceed this. In fact, there’s no limit on how high a stock that originated as a penny stock can go. Shares in some of the world’s most successful companies once traded for less than US$5, including Apple and Amazon. It’s just that once they grow well beyond the £1 or US$5 mark, they’re no longer technically penny stocks.

• The most obvious risk is losing all your money due to the high-volatility, high-risk nature of penny stocks. It’s also important to watch out for penny stock scams. For example, fraudsters may try to sell penny stocks in companies that they claim to be legitimate but don’t actually exist at all. Scam penny stocks are often promoted by text or email and are often not listed on legitimate stock exchanges.

• Only you can make that call. The key thing is to build an investment strategy to help you meet your goals. If penny stocks support that strategy as part of a balanced investment portfolio, and you go in with eyes wide open to the risks, you may decide it’s worth the gamble for the potential of stellar rewards. If not, then steer clear.

• There isn’t a specific rule on this. Day traders might hold penny stocks for just a few minutes. Longer-term investors may hold them for months or even years. It all depends on your investment strategy and the cut-off points for buying and selling you decided on in advance.

• “Pump and dump” refers to a scam where fraudsters boost a penny stock’s price through misleading hype, then “dump” their shares at the peak, causing a price crash. Avoid this by researching thoroughly, ignoring unsolicited advice, and being skeptical of “too good to be true” promises.

• Analysing penny stocks involves thoroughly examining the company’s financial health, competitive position, and leadership. Standard metrics (like price-to-earnings ratios) often fall short as these firms can be laden with debt and not yet profitable. Watch for red flags like limited information, sudden promotions, or erratic trading. Diversifying your portfolio can help mitigate potential losses.

• Penny stocks aren’t sector-specific, but they’re common in volatile fields like biotech or mining, which have higher potential for huge but uncertain returns. Remember, high potential doesn’t guarantee success. It’s essential to evaluate each company individually.

• Legendary investor Rick Rule, president and CEO of Sprott US Holdings Inc., advises paying close attention to a company’s past performance. In an interview, he said he reviews at least 5 years of financial documents to see if the company has achieved its stated goals and to examine how funds were allocated.

  Rule’s team once studied 25 randomly selected mining companies and found that 65% of raised capital was spent on general and administrative expenses, leaving only 35% for actual mining (in the ground). This lack of investment may explain poor performance.

  Always scrutinise a company’s track record and compare it to industry standards before investing. Don’t be afraid to dig deep!