Penny stocks, or penny shares, remain a firm favourite among traders. Check out our top penny stock trading tips for beginners – and find out how you can buy, trade or invest in these shares with us.
What are penny stocks?
Penny stocks are shares that trade at a lower price range than most: usually less than £1 in the UK and less than $5 in the US. You’ll find that penny stocks trade at these levels because they’re often issued by companies who’ve just listed via initial public offering (IPO) (so they don’t have much trading history).
Penny shares are found on smaller exchanges like AIM – not major exchanges such as the London Stock Exchange (LSE) or New York Stock Exchange (NYSE). They can also be bought and sold over the counter.
Trading or investing in penny stocks isn’t much different from getting exposure to mid-cap or large-cap companies. You’d still speculate on the value of the stock (trading) or own the physical shares (investing). The only difference is the typical cost of the shares.
Why trade or invest in penny shares?
Penny shares offer a deep pool in which to fish. There are hundreds of penny stock companies that are often overlooked, and a handful of them end up being very big catches. Even Apple (AAPL) was once a penny stock.
Of course, there’s also the chance that penny stocks may not perform. Small mining and commodity exploration companies are a classic example of this. A few strike it lucky and find the next big metal or oil deposit, but many more spend a lot of money without finding valuable resources.
Lastly, trading or investing in penny shares is known to be more volatile than taking a position on mid or large-cap shares, as small changes in their value are reflected as big price swings. If you prefer high-risk trading or investing, penny stocks may be for you. Remember to implement a sound risk management plan when trading a particularly volatile asset, as losses and gains can run faster than expected.
Ways to get exposure to penny stocks
With us, there are two ways to get exposure to penny stocks: investing and trading. We offer a wide variety of small-cap stocks, especially on our share dealing platform.
Investing (share dealing)
If you want to invest, you can do so using a share dealing account. Investing in penny stocks makes you a shareholder, and you’ll receive voting rights and dividend payments (if granted by the company). You’d have to pay the full value of your investment upfront. As for possible profits – you’ll only make money if you sell your shares for more than what you paid, but your losses will be capped at your initial outlay.
Open an investment account to get started
Trading (spread betting or CFD trading)
If you want to trade penny stocks, you’d use financial derivatives like spread bets and CFDs. Derivatives enable you to speculate on penny shares without owning them. You can go long (buy) if you think the price will rise, or go short (sell) if you think it’ll drop. You’ll open your position using leverage, which means you only need to put down a deposit (margin) while still getting exposure to the full value of the trade.
Note that leverage magnifies your risk, as any profits and losses will be based on the full position and not your deposit. You should always take steps to manage your risk.
How can you buy penny stocks online?
- Open an account – you can choose between a spread betting, CFD trading or share dealing account (or all three)
- Do your research – IG Academy is a good place to start, and you can also explore some upcoming IPOs
- Pick a penny stock – have a look at the best UK penny stocks
- Place your trade – you can use our award-winning platform1 or our app
10 penny stock trading and investing tips
- Practice on a demo account: you can open a demo account with us and practice your penny stock trades in a risk-free environment. We’ll even give you £10,000 in virtual funds. Our demo account is a simulation of the live trading environment where you can apply indicators, different timeframes and more
- Keep a trading diary: a record of what went well, and where improvements need to be made, is a very important step in any trader’s strategy. Keep refining your methods to help you become a more successful trader
- Use fundamental analysis: you don’t necessarily have to buy penny stocks of new companies with no track record. You can use fundamental analysis to find out when certain business factors may affect share prices to a point that they become penny stocks
- Use a good trading platform: we have a cutting-edge trading platform that you can personalise for your own needs. You can choose between web-based or mobile trading. All of our platforms have powerful tools to help you reduce your risk
- Research thoroughly: find an experienced mentor willing to share their knowledge, read reputable trading and investing publications, or use our website for the latest analyst insights. It’s not uncommon for people to talk up a stock with misleading information before dumping their shares at a profit
- Consider quality over quantity: ‘cheaper’ isn’t always better. Penny stock traders risk getting caught out by value traps if they don’t do their homework. For a company to have the best chance of performing well in the future, it needs to be a good business. Ask yourself why the stock is overly-cheap – it may be that it simply doesn’t have any intrinsic value
- Spread your risk: don’t pile all your capital into one stock that you’ve heard is tipped for greatness. Spreading your cash across a range of companies could reduce your potential for loss
- Accept lower liquidity: liquidity will always be lower than on the main market, as there are fewer buyers and sellers for penny stocks. Try to look for companies that have a few hundred thousand shares traded every day so that you’re more likely to get an opportunity to trade
- Set ‘buy parameters’ for yourself: if you set a buy cap for yourself, make sure you stick to it. It’s easy to get carried away and end up paying more than a stock is worth. You can plan your entries and exists using our range of tools
- Be realistic: penny share trading is not a ‘get-rich-quick’ scheme. Remember that you face the same benefits and risks as with any other type of trading
Our online trading platform
We have an award-winning online trading platform that gives you a smarter, cleaner and faster way to trade and invest.1 You can use this platform to buy penny stocks via spread betting, CFD trading or share dealing and get our best execution.
Our mobile trading app
Our trading app has been voted the UK’s best.2 You can buy penny stocks on the go via this platform and still enjoy our best execution – with a choice between spread betting, CFD trading and share dealing.
L2 Dealer is our ‘direct market access’ (DMA) platform. You can deal at quote, straight through the order books of international exchanges. Plus, you’ll get access to level 1 and level 2 price data. If you use L2 Dealer to buy penny stocks, you can do so via CFD trading or share dealing.
Trading and investing in penny stocks summed up
- Penny stocks are shares that trade at a lower price range: usually less than £1 in the UK and less than $5 in the US
- Penny shares are known to be more volatile than mid or large-cap shares
- There are two ways to get exposure to penny stocks with us: investing and trading. When investing, you’ll own the shares and, when trading, you’ll speculate on the share price
- We offer a wide variety of small-cap stocks, especially on our share dealing platform
1 Best trading platform as awarded at the ADVFN International Financial Awards 2021 and Professional Trader Awards 2019. Best trading app as awarded at the ADVFN International Financial Awards 2021.
2 Based on revenue excluding FX (published financial statements, October 2020).
Last updated : Thursday 30 December 2021