How to trade penny stocks (2024)

Penny stocks or penny shares are a common stock that trade for less than £1 on UK stock exchanges or less than $5 on US stock exchanges​. The low share price means the stock is likely to be a highly speculative investment.

Although the definition of a penny stock is a stock that is valued under £1 or $5 in the UK and US respectively, they have been expanded to cover stocks valued over these guideline prices. But generally, penny stocks have low share prices. They are usually characterised by very high volatility and are seen as higher-risk stocks, with the possibility of significant growth.

The appeal of trading penny stocks and penny shares in the UK is easy to see. If you have £1,000 to invest, you can get a considerably larger share percentage in a smaller company whose shares are trading for a few pence, rather than buying blue-chip shares​ that may cost much more for an extremely small percentage of ownership. And of course, if your penny share one day goes on to join the blue-chips, you could end up making large returns with the right trading strategy.

Penny stock markets are well known for being extremely volatile, and price fluctuations of around 20% are very common. Therefore, it is essential to conduct a thorough analysis while following your risk-management strategy before deciding whether or not to go forward with any trading decision. It is also best practice to trade in industries where there is large market growth as opposed to industries that are declining.

Penny stocks in the UK and internationally tend to not see much daily trading volume on the stock markets, therefore it often doesn't take a large buy or sell order to move the price. If plenty of people are talking about a penny share, on internet forums for example, that could also influence the price. It is important not to get sucked into an investment just because it has had a large one-day move and you’re afraid of missing out. What goes up quickly can come down even quicker – so make sure your reasons for investing are the right ones.

Trading penny stocks in the UK is an extremely risk-tolerant trading strategy, for the investor that is more risk-averse, a strategy involving undervalued stocks may present a better opportunity for speculative growth opportunities.

If you’re happy with your research and have made your trade, another key point is: don’t forget to sell. For example, let's say you are fortunate and the value of the penny stock moves in your favour and, for the sake of argument, it doubles. It can be very easy to sit back and wait for it to double once more. This is not always going to happen, and you should have a strategy in place for when it doesn’t.

When market sentiment​ changes on smaller shares, its price can about-turn very quickly, taking all of your hard-won profit and maybe more. Getting into the position is only half the plan of trading; in fact, some would say it actually accounts for less than that. Where you get out will determine just how successful penny stock trading could be for you.

We offer trading opportunities on thousands of your favourite global stocks, some of which are penny stocks in the UK and internationally. Penny stocks are often small or start-up companies chasing growth opportunities, though you will also find some big brand names that have experienced steep downtrends in their market value.

Below are some examples of UK penny stocks that currently trade for around £1 or less on the London Stock Exchange. This information is accurate as of April 2021.

Penny stocks can be traded in the same way as any other market on our trading platform. When trading penny stocks you either go long and ‘buy’ or go short and ‘sell’ the asset. The option to ‘buy’ or ‘sell’ offers the trader to play both sides of the market, doubling the potential opportunities available in penny stock markets.

An example of a UK penny stock listed on the London stock exchange is Petra Diamonds​.

As of March 2020, Petra Diamonds was trading for around 1.20p, with a market cap of just £10.4m.

Just 3 months earlier, Petra Diamonds was trading at 9.40p, around a 90% upside.

Although there can be large gains when trading penny stocks, there are also risks of losing a significant amount of your investment in a short period. We recommend using ‘stop-loss orders’ to limit your losses and ‘take profit’ orders to capture profit in an automated manner.

If you believe that the price of Petra Diamonds could increase in the future, you could go ahead and open a ‘buy’ position. As the stock price is so low, if the company ever made a comeback you could reap large rewards. However, the chances of the stock staying stagnant or losing more value are also just as possible.