How to Trade on Penny Stocks UK | Penny Shares to Watch (2024)

Also known as penny shares, they are companies that trade for less than £1 on UK stock exchanges and have a market cap below £100m, or trade for under $5 on US stock exchanges​ and have a market cap under $300m. Most do not trade on large stock exchanges, but instead on over-the-counter (OTC)​ transactions, meaning that in the UK, these tend to be listed on the FTSE Alternative Investment Market (AIM) index.

While their very low prices appeal to traders, they carry a high risk. Many are new or recently established companies with the potential for growth but tend to be highly volatile. It’s therefore essential for traders to do due diligence before engaging in penny stock trading. With the right strategy and the ability to spot a blue-chip in the making, traders can enjoy large returns. However, they are more prone to bankruptcy, meaning you could lose all your money.

As penny shares are small companies with few shareholders, it doesn’t take much buying and selling activity to make their share prices fluctuate. And because they are so cheap, one speculative trader’s bulk buy can often shift the price considerably. It is therefore quite common for a penny stock to leap or plunge as much as 20% over a short period of time.

This presents traders with an opportunity to make a significant profit very quickly — or make a huge loss. It can be easy to be sucked into a trade based on a one-day price spike, but the price is just as likely to plummet 24 hours later. It is essential to conduct a thorough analysis while following your risk-management strategy before deciding to embark on a trade. Here are some advantages and disadvantages of trading on penny stocks.

If you're on desktop, open a live trading account to spread bet or trade CFDs on the price movements of penny stocks. You can add funds to your account via bank card, bank transfer or PayPal. If you want to practise first with £10,000 of virtual funds, then open a risk-free demo account.

Alternatively, if you're on mobile, download our iOS or Android app* and sign up to get started.

At CMC Markets, we offer leveraged trading, which means that you only have to put down an initial deposit, known as margin, to gain exposure to a much larger trading position. When trading via derivatives, you also don’t take ownership of the underlying stocks.

The two types of leveraged trading products that we offer are the following:

Not sure which product would be better suited for you? Read our debate on spread bets vs CFDs​.

Let’s use an example from the chart below.

A trader may think that shares in Company A, priced at £0.70, are going to rise. So, they decide to buy (open a long position) and within a couple of hours, the stock price goes up. They decide to exit at £0.80 and make a £0.10 profit on each share.

The share price then falls, proving that the trader made the right decision. But later in the day, they spot another opportunity in Company B for £0.60 and place a buy order believing that the price will again rise — but this time, the share price goes down. The trader is concerned that it will fall further so they decide to sell at £0.40, having made a £0.20 loss.

But, because penny shares are so volatile, after they sell, the price goes up again to £0.70, meaning that if the trader had hung on a little longer, they could have made a £0.10 profit.

Not every stock has a low market cap. Some large-cap companies​ trade under the penny value threshold. Rolls-Royce’s market cap is around £7.5bn but in May 2022 it was trading at 80p per share. Lloyds Banking Group’s market cap is over £30bn but it traded under 1p after the 2008 financial crisis. These companies have long histories, make a profit and their share price does not tend to jump around.

So, are these firms considered penny stocks or not? There is no concrete answer.

While most are young and vulnerable companies, other older firms are trading at that level because of recent misfortunes or other circ*mstances. Rolls-Royce’s share price has been in steady decline since Covid-19 hit the aviation industry, but with the worst of the pandemic behind us, its fundamentals suggest it has the potential to build steadily back up again. Lloyds’ most recent profits exceeded market expectations and its position as the UK’s largest mortgage lender give it a secure future.

Some large companies finding themselves in penny stock territory are in terminal decline. Others, like Rolls-Royce and Lloyds, have strong fundamentals that make them attractive to those looking for longer term gain. In this sense they are not what most traders would consider penny shares, which lend themselves to short-term trades​ — but any large market cap companies with a low share price may potentially provide a bargain. As with any other stock, you should research the company itself. However, those with a higher market cap may take longer to realise a significant return.

Trading on penny shares is a relatively easy and straightforward process for both beginners and experienced traders. Our trading platform, educational resources and supportive client services team help our clients truly understand the markets, enabling them to realise their potential and make the most of their experience.

New to spread betting and CFDs? Set up your own risk-free demo account here, which gives you £10,000 of virtual funds to practise trading with before you commit to the live markets.

Whatever type of trader you are, our Next Generation platform can be personalised for your individual trading needs, combining cutting-edge trading tools with a straightforward interface.

It also comes in the form of a mobile app​ which enables you to trade on-the-go. Available for iPhone, iPad and Android, our trading mobile apps include full order-ticket functionality and advanced charting, specifically designed for mobile devices.

*Tax treatment depends on your individual circ*mstances. Tax law can change or may differ in a jurisdiction other than the UK.

CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circ*mstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although we are not specifically prevented from dealing before providing this material, we do not seek to take advantage of the material prior to its dissemination.