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What are penny stocks, and are they worth investing in?

08/08/2022

If you’re new to investing in shares, you may (understandably) be nervous about buying shares in companies with a high price per unit. You may have heard the term ‘penny stocks’ being used, and be wondering if they could be a good way to dip your toe in the waters.

Here’s what you need to know.

 

What is a penny stock?

A penny stock is a share in a company that trades for under £1 in the UK, or under $5 in the US. Generally, they’re not listed on an exchange: they’re often either smaller, newer companies, or companies that are in difficulty. 

For investors who focus their attentions on penny stocks, the idea is that they invest in these smaller companies with a view to growth – and therefore return – increasing over time. However, it’s important to understand the risks involved. 

 

What are the risks of investing in penny stocks? 

One of the major risks in buying penny stocks is the prospect of fraud – as seen in the hit film, The Wolf of Wall Street. Fraudsters pressure naive investors into buying penny stocks, inflate the price, and draw in more investors. Once the price has risen high enough, they sell off their own shares, leaving those they have scammed with shares that are worthless. 

However, there are other risks involved. There is generally less information available on these companies, as they’re newer and smaller with no proven track record. Trading volumes are lower, which means you could struggle to sell your shares. In addition, price volatility is high: just a minute move in the stock price could see huge losses. 

 

What are the benefits of investing in penny stocks?

Sometimes, investing in a penny stock can pay off – there are some great success stories out there. Just as price volatility can lead to great losses, it also has the potential to lead to significant gains. With such a great level of risk involved, experts will generally recommend that, no matter how much research you’ve done, penny stocks should only make up a tiny proportion of your portfolio, if any.

 

“Stable Rise Limited is not authorised or registered by the Financial Conduct Authority. The marketing materials are not intended to provide financial advice nor promote any individual financial products.”

 

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