Penny Shares

Penny stocks and shares cost below £1. If successful they can rise steeply, but they can also drop steeply. A recent paper by the Financial Services Authority (FSA) has described penny shares as being hard to buy or sell in large quantities without affecting the price- i.e. they have limited liquidity.

The reason people invest in penny stocks and shares is that they can seem like good value, even though this may not necessarily be the case. The price can actually bear no relation to the value of the stock. If there is a takeover bid, or interest shown in the company, the price can rise more dramatically than in a similar situation in a more established, successful company.

The best advice is to keep a close monitor on share prices and be ready to sell if necessary. Penny stocks and shares tend to be listed on the Alternative Investment Market (AIM) or The Off-Exchange Market (OFEX). Others can be listed on exchanges abroad, whilst others will be unlisted.

Penny shares have different categories, such as recovery stocks, cyclical stocks, internet companies and biotechnical companies. It is important, as with all investments, to know your market. For example, cyclical companies may do better during summer than winter, which affect the share prices at different times of the year, whilst biotechnical shares may rise in price if a company releases a new product. The most important thing to keep in mind when considering investing in penny shares is that you should try and predict the market based on knowledge, rather than base your decisions on past performance.