What are penny stocks and how to invest in them

Don't expect to get rich quick.
What are penny stocks and how to invest in them
Updated
June 18, 2021

Table of contents

Penny stocks don’t have the best reputation. 

They may be cheap but they’re often volatile and it can be hard to predict what their price is going to do. 

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

But like all stereotypes, the idea that all penny stocks are for speculative punts or Wolf of Wall Street scammers isn’t true. There are still plenty of penny stocks to buy that offer good value.

In this guide we’ll run through how to invest in penny stocks so you can get a better idea of how to approach them.


What are penny stocks?

Before we get started though, a brief introduction may be needed — what are penny stocks?

On the one hand, a penny stock is just a share that costs less than £1 in the UK or $1 in the US.

But it’s also shorthand for shares in smaller, less well-known companies. 

We tend to think of big names, like Facebook or Tesla, when it comes to stock trading.

In reality, there are thousands of firms listed on exchanges across the world and many of them are pretty small and not well known.

That doesn’t say anything about whether or not they are good businesses. 

Some are great. Some are terrible. Others are somewhere in the middle. And you have the fun task of figuring out which is which.


Where are penny stocks traded?

There are penny stocks to buy on most exchanges but the most popular ones tend to trade on UK and US exchanges.

OTC penny stocks vs NYSE/NASDAQ penny stocks

In the US, both the Nasdaq and New York Stock Exchange offer penny stock trading. 

Because penny stocks generally have lower trading volumes, some brokers, particularly those outside of the US, will not offer all of them.

One other way to access US penny stocks is via the over the counter — or ‘OTC’ — market.

OTC stocks are purchased directly from brokers and other financial services businesses. 

They tend to carry a higher level of risk with them. 

That’s because the main reason you cannot buy OTC penny stocks on an exchange is the companies issuing them usually can’t, or don’t want to, adhere to the regulatory standards imposed by exchanges.

This inability (or willingness) to meet certain standards might be a red flag, so be very careful if you do decide to buy penny stocks on the OTC market.


Trading penny stocks on LSE

Most UK penny stocks list on the London Stock Exchange’s (LSE) Alternative Investment Market (AIM).

AIM is renowned for being a bit of a wild west. 

There are some big winners trading on the exchange but there have also been some serious duds in the past too.

One thing to be aware of is that AIM-listed stocks do not have to meet the same listing standards as companies that trade on the LSE’s main market.

This is not something to be overly anxious about — you still have to meet several requirements before you can trade on AIM. But do not expect the same standards that you would from bigger UK stocks, like BP or Vodafone, trading on the LSE’s main market.


How to invest in penny stocks?

Most investment accounts that provide access to the stock market let you buy penny stocks.

Some will provide more than others and this is generally because of liquidity issues. 

A lot of penny stocks have very low trading volumes, which can make it harder for brokers to offer them.

That’s why it’s worth checking a broker’s stock list before you sign up for anything.


Advantages of investing in penny stocks

  • More affordable than popular stocks
  • There could be some undiscovered gems.
  • Potential for large growth. 


Disadvantages of investing in penny stocks


  • Often highly volatile with the potential for big losses on your initial investment.
  • Can have low liquidity, which often translates into poorer pricing and wider spreads.
  • Companies issuing them do not generally have to adhere to the same high regulatory standards that larger firms do.
  • There is generally a lower level of transparency with penny stocks, making it harder to get information about the company.


List of most traded penny stocks on Freetrade

Penny stocks UK list

Some Freetrade customers invest in penny stocks. Our penny stocks UK list details some of the more popular ones.

Remember though, just because others are doing something, doesn’t mean you should too.

Each business in the list below is unique and has its own set of operations, executives and finances. You need to figure out if they are suited to your risk tolerance level and portfolio before buying anything.


Penny stocks US list

As we’ve seen already, offering US penny stocks can be trickier for brokers outside of the US because of liquidity concerns. 

So even though many of them have been trading below a dollar before, some of the stocks in the list below are now priced above $1.

And as with above, remember that each of these companies is unique and will have their own set of risks, so do your research before you buy anything.

  • Assertio - a specialist pharmaceuticals business.
  • McEwen Mining - a gold, silver and copper mining company.
  • Molecular Data - a company that provides software and data analytics tools to the chemicals industry.
  • Ring Energy - an oil and gas exploration and production firm that’s based in Texas.
  • Uxin - an ecommerce business that runs an online marketplace for used cars in China.
  • SeaChange - a company that makes software for video streaming.
  • Phunware - a company that makes mobile tracking and advertising software.
  • Sunlands - a company that provides online education services in China.


How to find penny stocks

Setting out to buy penny stocks is not something you should really do because a company’s stock price often tells you little about what it’s actually like as a business. 

For instance, Lloyd’s is a huge, widely-respected bank which consistently turns a profit. Its shares have still traded at less than a pound for long periods of time. But then there’s no way it would be classified as a ‘penny stock’ by most investors.

The other thing is that penny stocks do not belong to one industry. Like the stock market as a whole, there are loads of different companies with shares costing under a pound or dollar. 

So saying you want to buy penny stocks is a bit like saying you want to buy stocks. It doesn’t really help you identify a good investment or narrow things down very much.

The big caveat to this is that penny stocks are generally unloved and less well known. This has particularly been the case since regulations in Europe — called MiFID II — came into play back in 2018.

Without going into the specifics, those regulations made it much pricier for big financial institutions to research smaller stocks. So there really is a lack of widely available information for many of them that you can gain from if you’re smart about things.


4 Penny stocks investment tips for beginners

Finding good penny stocks involves doing many of the same things you would if you were looking for good stocks in general.

Our how to invest in stocks for beginners guide is a great place to get started if you aren’t familiar with that process. But here are some other tips to help you on the way.

1. Look for future growth sectors - Old industries don’t mean a business is bad by any stretch but if you want to narrow your options down, look for companies that are active in sectors you think are going to grow a lot in the future. Green energy or graphene companies might be an example of this. You could even look at alternative income sources too.

2. Who is running the business? - It may seem obvious but do research on the background of the company executives. Maybe they’re serial entrepreneurs with lots of experience. Or maybe they’re less savoury characters with a long history of failures. It pays to know.

3. Check the finances - Penny stock companies may not have to adhere to the same regulations as bigger players but they still need to publish some accounts. Check them. See if the business is making money and doesn’t have huge debts. If it does have debt, make sure it has the money to pay it off. 

4. Don’t be fooled by the share price - People often assume that a penny stock can make them rich because it’s cheap. In reality it’s probably because the stock is only worth less than a pound. If you do research that tells you otherwise then it may be worth investing but make sure you aren’t just buying something because it’s cheaper than other shares.


Can you get rich from investing in penny stocks?

That this question comes up so much when discussing penny stocks is indicative of how many people approach them.

Thinking you’re going to get rich by just buying any old junk, solely because its shares cost under a quid, is not the way to go.

You should not see penny stocks — or investing as a whole — as some sort of get rich quick scheme. The odds are that you’ll end up losing lots of money if you do.

This is not to say that penny stocks are not worth buying. Instead you should just treat them the same way you would any investment. 

If you do a good amount of research and come to the conclusion that a penny stock is going to perform well in the future then it may well be worth an investment. 

And because they are so much cheaper, the growth potential is much higher. 

Will that make you rich? It may make you a good amount of money, yes. 

But again, if you approach penny stocks with the idea that you’ll be sipping champers and driving a Ferrari not long after you buy, then you’re almost guaranteed to be disappointed.

Important information on SIPPs

SIPPs are a pension product designed for people who want to make their own investment decisions. You can normally only access the money from age 55 (set to rise to 57 from 6 April 2028).

This article is based on current rules, which can change, and tax relief depends on your personal circumstances. When you invest, your capital is at risk.

The value of your portfolio can go down as well as up and you may get back less than you invest.

Before transferring a pension you should ensure you will not lose valuable guarantees or incur excessive transfer penalties. Pensions are usually transferred as cash so you will be out of the market for a period.

Freetrade does not currently offer drawdown products for our SIPP.

Important information

This should not be read as personal investment advice and individual investors should make their own decisions or seek independent advice.

When you invest, your capital is at risk. The value of your portfolio can go down as well as up and you may get back less than you invest. Past performance is not a reliable indicator of future results.

Eligibility to invest into an ISA and the value of tax savings depends on personal circumstances and all tax rules may change.

Freetrade is a trading name of Freetrade Limited, which is a member firm of the London Stock Exchange and is authorised and regulated by the Financial Conduct Authority. Registered in England and Wales (no. 09797821).

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