Penny stocks: A beginner’s guide

Penny stocks don’t have the best reputation. 

They may be cheap but they’re often volatile, which makes it especially hard to predict what their price is going to do. 

It doesn’t help that many of the penny shares UK investors buy are often treated like racehorses at a bookies’ office. 

But, as tends to be the case with stereotypes, the idea that all penny stocks and shares are for speculative punts or Wolf of Wall Street scammers isn’t true. There are still penny stocks to buy that can offer good value for an investor.

Key to that is avoiding getting sucked into what looks like a deal but is actually just a dud hiding behind a cheap price. In this guide, we’ll run through how to identify good value when investing in penny stocks so you can decide whether these stocks are right for you or not.

Don't expect to get rich quick

It’s important to remember that price does not equate to value. Just because one share is cheaper than others doesn’t mean it has a better opportunity for growth. 

A meal deal is great and all, but if the chicken salad’s gone off, it won’t make for a great lunch.

Likewise, with penny stocks, you might be getting what you paid for: nothing all too good.

Penny stocks are not a get rich quick scheme. And if anything, they require an extra layer of scrutiny before you invest in them rather than other shares. That’s because penny shares tend to represent small companies that have fewer regulations and reporting requirements. So they’re not as closely monitored as other, larger firms.

Before we get stuck into all things penny-wise, it’s important to highlight that this is not a suggestion or recommendation that you buy or sell any of the penny stocks mentioned. 

Remember that everyone has their own goals and unique financial circumstances. These, along with your tolerance for investment risk and time horizon, should inform the mix of assets in your portfolio. 

Our guide on how to invest in stocks is a great start for first-time investors. And if you are still unsure of how to pick investments, you should seek professional advice.

What are penny stocks?

Let’s start with the basics: what is a penny stock or penny share?

A share is usually classified as a penny stock if it costs less than £1 in the UK or $5 in the US.

These companies tend to have market caps below £100m in the UK or $300m in the US. So smaller, lesser known companies are sometimes dubbed penny stocks even if their share price is above £1 or $5. There are thousands of firms listed on exchanges across the world and many of them fulfil this definition.

And while the most commonly bought stocks on Freetrade tend to be larger companies, smaller companies can be hidden gems if you know where to look and what to look for. Size isn’t everything. At the same time, they’re significantly more volatile and tend to carry a lot more risk.

Where are penny shares traded?

‍You can buy penny stocks on most stock exchanges, but the most popular shares tend to trade on UK and US exchanges.

LSE penny stocks

‍In the UK, penny stocks are usually found on the AIM (Alternative Investment Market) index. AIM is a sub-market of the (LSE) London Stock Exchange with fewer regulatory and listing requirements. That enables smaller firms to access capital with greater ease than if they were to try and list on the LSE Main Market.

The Main Market requires companies looking to list shares to have a minimum market cap of £30m, which is out of reach for many smaller businesses.

Companies listing on AIM do not need to meet a minimum market cap, while compliance requirements are also less stringent. That makes AIM-listed companies less regulated and higher risk than Main Market-listed companies. At the same time, AIM companies are more likely to be in growth mode than those found on the Main Market. So your risk tolerance and investment objectives are key to determining whether AIM penny stocks make sense for your portfolio and financial circumstances.

One of the benefits of investing in AIM-listed shares is that you won’t pay stamp duty, so long as those shares aren’t listed on another market too. On the Main Market, you’ll pay a 0.5% stamp duty tax on the value of your stock purchase (but not the stock’s sale).

AIM’s less regulated nature is why it’s especially important to understand the companies behind the investment when it comes to penny stocks. You may need to do extra digging than you would with a Main Market listed stock, given they’re likely to have less readily available investor information.

Source: Price return data from Yahoo Finance, as of 21 November 2025. Past performance is not a reliable indicator of future returns.

Comparing the price return performance of the UK Main Market index to the entire UK AIM index, AIM has underperformed over the past five years. 

Historically, AIM has performed better when inflation expectations rise and the price of commodities do too. This period is known as ‘a cyclical upturn’, where the market’s appetite for risk tends to increase. Given AIM shares are higher risk than those on the UK’s Main Market, AIM tends to be in higher demand.

The entire AIM index comprises a large breadth of companies, totalling nearly 700 firms as of November 2025.

OTC penny stocks vs NYSE/NASDAQ penny stocks

In the US, you can find penny stocks on the Nasdaq and the NYSE (New York Stock Exchange). But because penny stocks tend to have lower trading volumes, some stock brokers won’t offer all of the listed options.

US penny stocks are also accessible through the over the counter (OTC) market. These stocks are known as pink sheet listings. Many pink sheet listings are seen as more speculative, volatile and carry higher risk than those on a major stock exchange. 

OTC stocks are purchased directly from a broker or other financial services business. This essentially means there’s no intermediary between you and the stock owner, so the transaction carries a higher level of risk.

The main reason a US penny share would trade OTC as opposed to on the Nasdaq or NYSE is that it won’t have to adhere to the stricter regulatory standards of the other stock exchanges. It’s similar to why a UK share would list on AIM as opposed to the Main Market.

This can be a matter of a small company preferring to avoid the costly regulatory burden of meeting the listing and ongoing reporting requirements necessary for trading on a major exchange. It might also mean the company is simply incapable of meeting those same standards. 

Pros and cons of investing in penny stocks‍

How to invest in penny stocks?

Before you consider investing in penny stocks, you need to decide whether the high volatility and risk attached are suitable for you and your investment needs. You need to be comfortable with the greater likelihood that your investment’s value could go down. 

If you’re financially able to, and have the risk tolerance, then perhaps some penny shares may be a fit for your portfolio. But even if that is the case, your best bet isn’t to just set out searching for penny stocks. If you find an investment that you think is fairly priced and offers good value, and it happens to be a penny stock, then that’s a better direction to take. 

Once you do, you can trade penny shares in the same way as you’d trade more expensive shares. 

1. Research: This stage is key to deciding whether a penny stock is right for your portfolio. You might choose to investigate emerging high growth sectors, check out burgeoning trends in the market, or read other stock news and analysis for ideas. 
2. Pick a platform: You can buy penny shares online in the UK. It’s as simple as searching for the stock on your respective brokerage platform. Freetrade has over 6,200 stocks to choose from in app or online, with many priced at under £1 or $5.
3. Consider your trade: Decide how many shares you want to buy. Remember, just because one share is cheap doesn’t mean you need to buy more. There’s no harm in starting small and gradually adding more to your investment as you gain confidence.
4. Place your trade: Make your investment.
5. Monitor your investment: Once you’ve made your trade with your broker of choice, it’s good to keep track of your investment. Try not to be impulsive with buying and selling, but small cap stocks can fluctuate with greater speed and intensity than larger, more liquid stocks. You might choose to create a stop-loss order, setting a price at which your shares will automatically sell to limit losses.

Most popular penny stocks 

To reiterate, the following list of penny stocks is not a recommendation to buy or sell any of these securities, nor is it a list of penny stocks to watch. This is simply a wrap-up of some of the most popular penny stocks purchased on Freetrade so far in 2025.

Penny stocks UK list

The 10 most popular UK penny stocks on Freetrade in 2025 YTD

Source: The 10 most popular UK penny stocks, bought for £1 or less on Freetrade in 2025 YTD, based on the total value of buy orders.

Penny stocks US list

The 10 most popular US penny stocks on Freetrade in 2025 YTD

Source: The 10 most popular US penny stocks, bought for $5 (aprx. £4) or less on Freetrade in 2025 YTD, based on the total value of buy orders.

How to find penny stocks

If you’re trying to find a penny stock for the sake of it being a penny stock, stop.

Prioritising the price of a stock above everything else will lead to mistakes in decision making because price alone means nothing in isolation. And ultimately, making decisions without sufficient data leads to taking on much higher risk than needed.

On the flip side, if the reason you’re keen on penny stocks is for the potential of a higher return from a more volatile share, that’s not always going to be the case.

Consider Lloyds Bank, which has long traded at less than a pound, and was the most popular share bought under £1 on Freetrade in 2025 at the time of writing. Though with a market cap of over £30bn, it wouldn’t be dubbed a penny stock by most investors. It’s a bank with over 250 years of history, with a proven ability to generate a profit.

But its share price never really recovered after the 2008 financial crisis, nor has the bank managed to get back to its pre-pandemic levels.

That’s why it’s important to look at the company first, then determine whether the price of the stock lines up with the value you think that investment can bring.

Beginner's guide to investing in penny stocks 

1. Look for growth sectors, then work your way backwards. 

An older industry isn’t necessarily a bad one, but usually it’ll already have clear, well-established dominant players less prone to explosive growth. 

So if you want higher risk stocks with larger growth potential, look at the industries you believe are primed to take off. Green energy is another budding area with plenty of new firms and ETFs entering the space at breakneck speed.

2. Do management have a proven track record?

You always want to trust the management team of companies you invest in, but especially so with penny stocks. In smaller companies, management tends to have more power and less oversight. You need to feel confident that, even without the added red tape of a Main Market listing, the company is still in good hands.

3. Focus on fundamentals. 

Tempting as it may be to believe a penny stock will yield a higher return than a more expensive share, it’s certainly not always the case. 

It’s only a sound investment if the underlying business is sound too. Here are some key metrics:

• Liquidity ratios: These measure a company’s ability to cover short-term liabilities. Typically, smaller companies have less cash on hand or higher levels of debt, because they’re more focused on financing growth as opposed to paying dividends. A lower liquidity ratio might mean the company’s having a hard time advancing its operations, because it has less cash than debts, for instance. 
• One example of a liquidity ratio is the current ratio. It’s measured by taking a company’s current assets and dividing by current liabilities. Typically, a value of 0.5 or below would indicate low liquidity. As an investor, you need to be wary that lower liquidity means a higher risk of defaulting on payments to suppliers, and potentially you as an investor.
• Valuation ratios: These ratios can help you figure out if a stock is a good investment at its current price. The price-to-earnings (or P/E ratio) is an example of a popular valuation measure used to assess a stock’s price relative to its earnings per share (EPS). P/E is calculated by dividing the stock price by EPS. When you’re using this ratio, it’s a relative exercise, meaning it’s about what you get for the price you pay. So a low P/E ratio might mean the stock’s price is low, but that’s relative to the firm’s earnings. When it comes to penny stocks, the P/E ratio is especially important because it considers the stock's cheapness relative to what the company is proving about its worth.

4. Don’t be fooled by share price alone. 

We’ve said it once (okay, maybe a couple of times more than that) but we’ll say it again. Penny shares are no exception to the rule you should always question the investment case being presented to you. Sometimes, if it’s too good to be true, it is.

Stocks under £1 with potential

A look at the performance of some of the most popular UK penny shares shows that stocks at lower price points can witness massive fluctuations in their share prices. That’s a matter of simple maths. After all, if you’re starting at a lower base point, any change will seem greater.

The above selection is just a snippet of some of the most popular UK penny stocks on Freetrade. And it proves just how much those returns can ebb and flow. A stock might look like it has ‘potential’ one year, but that can turn around just as quick in another. 

Sometimes, smaller or newer companies can be subject to a lot of hype, which means their returns are especially challenging to predict. An inflated share price may be the result of ever-excited market sentiment as opposed to consistent profitability or reliable dividend payments. As we’ve mentioned, that’s another reason penny stocks are worth an extra dose of monitoring, or measures like stop losses to prevent huge declines in your portfolio’s value.

Can you get rich from investing in penny stocks?

Ah, if only it were that easy.

Don’t assume a cheap stock can make you rich quickly. Often, the reason a stock costs less than £1 is because it’s worth less than £1.

That’s not to say a penny share is never right for your portfolio.

If you’ve done your research and feel comfortable with the level of risk involved in your investment, then a penny stock might make sense for you. 

These stocks need to be treated with more scrutiny than a Main Market or large stock exchange investment. That’s especially important during times of high market volatility, where even mega-cap companies are witnessing large changes in share prices.