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Trading on penny stocks

Published on: 02/11/2021 | Modified on: 20/09/2022

Many of the world’s biggest and well-established companies were once trading as penny stocks for under £1 a share. In 2000, Apple was worth just $0.80 — then the equivalent of £0.55. In December 2019, Covid-19 vaccine maker Novavax traded for $4 and just as recently, Ford stock was worth $2. But what are they? Read on to find out how these types of stocks are defined, the pros and cons of trading and how to spot the low-price bargains that could potentially make you money.

KEY POINTS

  • Penny stocks are some of the cheapest — trading for under £1 on UK exchanges and $5 on US exchanges
  • They can be very volatile, bringing potential for sudden sizable profits but equally losses
  • Many are small, young companies, making them a high-risk trade
  • Most do not trade on large stock exchanges and sometimes are over the counter (OTC) assets
  • Some of the world’s largest companies began as penny shares
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What are penny stocks?

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.

What are the risks and rewards?

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.

Pros:

  • They are cheap – you can buy a lot of shares without breaking the bank

  • You can make rapid gains

  • You might discover the next big company or trend

Cons:

  • They can be volatile, so you could suffer large sudden losses

  • Many of these companies will never take off, and many go bust, losing you every penny

  • Very few are tracked by analysts or investment banks, which can make company information difficult to come by

  • Once bought, they might be tricky to sell

  • They are susceptible to fraud – their cheap price makes it easy for a group of unscrupulous traders to push the price up by continuously buying them from each other

  • Spreads tend to be wider than other shares, which can make it difficult to obtain a decent price

How to trade on penny stocks

  1. Research to find the right stocks for you. Use our exclusive Morningstar and Reuters tools and review our news and analysis​ section to inform your trading efforts.
  2. Decide if you want to buy or sell. Determine your entry and exit points based on your trading strategy. Go long and ‘buy’ if you think the instrument price will rise or go short and ‘sell’ if you think the price will fall.
  3. Manage your risk. Before placing your trade, make sure you have followed risk-management guidelines​ as part of your strategy.
  4. Determine your position size and place the trade. Apply stop-losses and take-profits if necessary and confirm your trade.
  5. Monitor your position. If making a profit on their position, some traders may wish to stick to their trading plan and close out when the target price is reached.


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.

How can traders access stocks via derivatives?

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:

Spread betting

Spread betting is our most popular product, allowing you to trade tax-free in the UK and Ireland*. Spread betters may place a bet on which direction they think a penny stock will move by opening a long or short position. Depending on which way the market moves, you will either make a profit or equal loss.

CFD trading

Contracts for difference (CFD) are another popular method of leveraged trading. CFD traders speculate whether they believe the asset will fall or rise by entering a contract stipulating that the buyer must pay the seller the difference between an asset’s current value and its value when the contract expires. Profit and loss are based on the difference between these two values.


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

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  • Subject to capital gains tax*

  • Available to customers globally

  • Short selling and hedging allowed

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Example of penny stock trading

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.

Top penny stocks in the UK and US

Trading opportunities can include both stocks in the UK, as well as those in other countries. Here is a penny stock list for those trading for under £1 in the UK and $5 in the US.

UK penny stocks

Instrument Min spread Margin rate Price Overview
- - - - Formerly Connect Group, the UK’s largest distributor of newspapers and magazines, as well as stationery, books, and consumables.
- - - - Irish low-cost airline with primary bases in Dublin and London Stanstead. Largest European budget airline by scheduled passengers flown, serving over 40 countries.
- - - - The UK's largest online-only white goods and electricals retailer, selling products such as fridge-freezers, washing machines, vacuum cleaners, and printers.
- - - - Market leader in the manufacturing and operation of photobooths, vending equipment, and other consumer solutions.
- - - - Utility company that owns British Gas, the UK’s largest domestic supplier of gas with over 7 million customers, as well as an electricity provider.
- - - - Chain of over 650 restaurants and public houses. Leading brands include Wagamama, Frankie & Benny’s, and Chiquito.
- - - - A real estate investment trust (REIT) that owns, manages and develops European retail properties. The group’s portfolio is made up 20 flagship destinations.
- - - - A multinational textiles company, it’s the world’s largest manufacturer and supplier of industrial threads and supplies, also producing zips and fasteners.
- - - - Anglo-Russian gold mining company that explores, extracts, and produces a stable output of low-cost gold, mainly within the region of far-east Russia.

US penny stocks

Instrument Min spread Margin rate Price Overview
- - - - 100-year-old US global shipping and mailing company that has expanded into digital communication, ecommerce and financial services.
- - - - Innovates targeted protein therapeutics (TPTs) for cancer treatment. Its flagship bladder cancer drug Vicineum was not approved by the US Food and Drug Administration but is in the process of being resubmitted.
- - - - A 25-year-old Silicon Valley tech company specialising in video and pixel processing semiconductors for digital image and video display and projection.
- - - - Wrap is a global leader in public safety technologies and services. It provides policing solutions to clients including law enforcement and security personnel.
- - - - The company develops digital media and content technologies such as social networking and video editing through several owned subsidiaries.
- - - - This Canadian cannabis company is listed on the Nasdaq and produces inhalable products, such as vapes, pre-rolls and flowers.

Pricing is indicative. Past performance is not a reliable indicator of future results.

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What strategies can be used?

As with higher value assets, there are several ways that penny share trading can realise profits, but the risks mean some approaches are generally more suitable than others.

Buy and hold approach

As the name suggests, you would enter a position and then keep it open in the hope of gaining profit over time. The volatile nature of penny stocks means that the longer you keep the position open, the more likely any immediate gains will be wiped out.

Shorting

It’s possible to make money shorting stocks​ but the market’s volatility means a high-volume position could also lose you a lot of cash very quickly. A short seller would look for a small-cap share and open a sell or short position if they expected its share price to fall, tending not to hold the position for a long time. However, this strategy comes with many risks, especially for beginners.

Day trading

Another suitable approach is day trading, simply because share prices go up and down so quickly. With this strategy, you would have to swoop fast to maximise any profit, opening and closing multiple positions throughout the trading day.

Tips for getting started

  • Follow the popular trades. Some traders may choose stocks with a high average daily trading volume, because if you don’t, the scarcity of trades might make it difficult for you to close your position quickly.

  • Don’t fall for the hype. Many companies, especially new ones, will try to sell you an emotive narrative that they will be the next big thing. If you are carried along by the story or the hype, your heart can end up ruling your head. By all means take advantage of, say, a positive news story that could briefly spike a stock, but always be rational in your trades.

  • Limit your shares. Holding a sizable position, particularly in a small company, can make it difficult to close in a hurry.

  • Sell quickly. The volatility of penny stocks means that as soon as you buy, you should immediately be keeping an eye on the best time to sell. Be vigilant and ready to move.

  • Do your research. Look for companies that have positive earnings reports or other objective information that suggests the company is generally going in the right direction, even if its stock is volatile.

Penny shares with a high market cap: how are they defined?

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 circumstances. 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.

Comparison with other stocks

SIZE CAP DEFINITION BENEFITS DRAWBACKS
Nano-cap stocks Below $50m Appeal to those wanting high risk Size makes the stock vulnerable to manipulation
Micro-cap stocks $50m–300m High growth potential Tends to be less information to inform trading decisions
Small-cap stocks $300m–2bn Less competition from institutional investors — better returns compared with larger caps Limited liquidity: a less well-known company means fewer buyers or sellers to trade
Mid-cap stocks $2bn–10bn A happy medium between small-cap growth and large-cap stability Not the riskiest category but more vulnerable to market downturns than large-cap stocks
Large-cap stocks $10bn–200bn Transparency regulations make them easier to evaluate. Are also likely (though not guaranteed) to have reputable management to have built them this far Marginal growth: any returns are likely to be slow and steady
Mega-cap stocks $200bn+ Seen as generally safe with a more predictable rate of return Tend to be higher priced
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How can you get started?

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.

Explore our penny share trading platform and app

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.

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FAQs

Are penny stocks good for beginners?

Penny stocks can be a good way for beginners to start trading , as they usually sell for under $5 a share in the underlying shares market. Learn how to succeed in share trading with our extensive guide.

Can you profit from penny stocks?

Penny stocks can be volatile in the share market but some investments with high growth potential may lead to profits in the future. If you’re looking to invest in more typically stable and reliable shares, some traders choose to focus on blue-chip stocks instead, as these are more established and may be less prone to risks.

What’s the difference between penny stocks and small-cap stocks?

Both small-cap stocks and penny stocks represent shares with low market capitalisations. However, penny stocks tend to be traded over-the-counter (OTC) and they have a lower share price of under $5 per share. Learn more about trading on shares.

How do I choose which penny stock to invest in?

It’s a good idea to conduct research before choosing a penny stock to trade. For example, our news and analysis section of the website posts daily updates on stock market data, as well as fundamental analysis reports for company earnings.

Do penny stocks pay dividends?

Penny stocks with minimal revenue rarely pay dividends to investors, as this tends to be reserved for companies with more stable cash flows and balance sheets. For information on some of the top performing stocks, read our guide to the best-yielding dividend stocks in the UK.


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

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