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How to Trade Penny Stocks UK: Are They Worth Investing In?

A classic case of high-risk, high-reward securities, penny stocks are attractive to many. Check our guide to discover how to trade penny stocks + risks and benefits involved.
Chris Williams
Author: 
Chris Williams
Sharon Bahravi
Editor: 
Sharon Bahravi
6 mins
November 13th, 2023
Advertising Disclosure

Our Top Broker Choice for Trading Penny Stocks

Freetrade7.6Visitfreetrade.io

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

What Are Penny Stocks?

Penny stocks are stocks that trade for less than $5 per share in the US and £1 per share in the UK. They tend to involve minor, less established companies that don’t have the backing of more prominent investors like blue-chip stocks do. Penny stock prices are highly volatile, making them difficult to predict due to the low liquidity.

Penny Stocks vs Blue-Chip Stocks

Blue-chip stocks refer to stocks of larger, more well-established companies with a long history in the stock market. These stocks tend to be less volatile, have higher liquidity, and represent large corporations like Apple or Amazon. They are also usually part of an index or ETF (Exchange Traded Fund) and are considered safe investments. On the other hand, penny stocks are much more volatile and represent smaller companies that don’t have the backing of larger investors. As a result, they are riskier investments and have less liquidity, but they can potentially offer a higher return on investment. Besides being highly unpredictable, penny stock doesnt have the same protections as blue-chip stocks, such as being part of an index or ETF.

What is an OTC Market?

While you can find penny stocks in major exchanges like the LSE, they are found more often on over-the-counter (OTC) markets.

The OTC, or “Pink Sheets”, is a less regulated market that allows investors to beginners buy penny stocks at lower costs. Companies listed on these sorts of exchanges do not have to meet as many criteria as those listed on a major exchange. However, they still need to abide by specific disclosure laws. OTC stocks can be traded on a brokerage account or through an online trading platform like Freetrade.

How to research penny stocks?

High-risk, high-reward securities like UK penny stocks require care and caution when researching. Many low-cost securities you will see belong to companies that are headed to bankruptcy or in substantial debt. To refine your search, you can benefit from different schools in market analysis. Day trading penny stocks may generate short-term gains, but it is difficult to achieve long-term profitability due to the high volatility and inherent risks associated with these low-priced securities.

Technical Analysis

Technical analysis involves looking for patterns in price movements that may indicate buy or sell signals for specific stocks. It takes its roots from the renowned stock trader Charles Dow, who developed the Dow theory to analyse stock market trends. Technical analysis has evolved over time to include approaches like support and resistance, price waves and patterns, and indicators. The underpinning principle, however, is the use of past price action to predict the future price movement of a stock.

Fundamental Analysis

Generally speaking, fundamental analysis involves looking at the underlying factors that could lead to stock price changes. This includes company financials, news and events related to the company or industry, macroeconomic trends, and other information which can be used to make an investment decision. It is a more qualitative approach than technical analysis and requires more research and knowledge of the stock market.

Risks and Benefits Involved

  • High Potential Returns – Penny stocks can offer a higher rate of return on investment compared to blue-chip stocks due to their low price and high volatility. This can result in huge gains for investors who get in at the right time.
  • Low Investment Requirements – Penny stocks can be bought in large quantities with a small initial investment, making them accessible to all types of investors.
  • Diversification – Investing in the best penny stock provides an opportunity to diversify a stock portfolio and spread out risk across different markets and sectors.

How to Invest in Penny Stocks: A Step-By-Step Guide

I. Learn the basics

Before investing in any stock, it's crucial to have a basic understanding of what penny stock trading involves, including how to read financial statements and analyse company fundamentals. This also involves taking the time to learn different penny stock trading strategies and investment concepts.

II. Research and select stocks

Once you have a basic understanding of the best penny stock trading, it’s time to start researching potential investments. Look for stocks that show promise based on their fundamentals, financials, news, and other available data.

III. Open a trading account

Before buying or selling any penny stock, you will need to open a brokerage account with an investment platform that specialises in penny stock. This is where your funds will be stored and managed. Again, make sure to research and compare different brokers to find one that fits your budget and needs.

IV. Decide how much you'd like to invest

It’s essential to know how much money you are willing to risk when trading penny stocks. Start small and increase your investments as you gain experience and confidence in the market.

V. Execute and monitor your trades

Once you’ve opened a trading account and identified the right stock, it’s time to execute your trades. Monitor your portfolio and adjust accordingly as the markets fluctuate. Keep an eye on news regarding the companies you’re invested in so that you can make informed decisions when necessary.

Are Penny Stocks Safe?

In summary, investing in the best penny stock can significantly diversify a stock portfolio while potentially earning higher returns than blue-chip stocks. To stay safe, it's best for investors to research stocks adequately and trade with penny stock trading brokers allowing OTC trades.

FAQs

Why are penny stocks highly volatile?
How do I make money trading penny stock?
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Contributors

Chris Williams
With a masters in Business administration, Christopher is a financial content writer with a knack for crafting articles, blogs and insightful reviews about all areas of finance. His passion for writing led him to work as a full-time writer for forex brokers (DecodeFx, Keytomarkets) and crypto blogs (Bitcompare), creating educational pieces for investors and traders around the world. In his spare time, he runs a crypto YouTube channel while learning about ways to help his readers make better financial decisions.
Sharon Bahravi
Sharon Bahravi has been a developmental and managing editor since 2010 and helps authors through various stages of their manuscripts and blogs. An entrepreneur, educator, speaker, and fitness trainer, she has written on a range of subjects and heads up the Language Analyst team for Pluralytics. Sharon loves horses, music, poetry, and coffee - not necessarily in that order.