Penny shares might be a suitable investment stream to consider if you have a higher appetite for risk. This is because they are much more volatile than traditional blue chip stocks, and liquidity levels are often super-low. As they sometimes trade outside of the London Stock Exchange, the process of buying penny shares can be challenging, too.
In this guide, we explain how to buy penny shares in the UK. This includes the best brokers to do this with, as well as a brief discussion on the best penny shares to buy in 2020.
How to Buy Penny Shares with 0% Commission
- Choose a 0% commission stock broker – we recommend registering with eToro.
- Fund your account with card, Paypal or instant bank transfer (min deposit $200).
- Select a company stock and open a position by clicking ‘Buy’.
- To buy and own physical shares, select 1x (zero leverage).
- To trade the share as a CFD, specify your Stop Loss, Leverage (2x or more), Take Profit and open your trading position.
To learn more, continue reading this guide.
What are Penny Shares?
The term ‘penny shares’ is somewhat of a broad one, as there is no one-size-fits-all definition in the UK trading scene. This is because, in theory, all UK stocks are penny stocks. After all, companies listed on the London Stock Exchange are priced in pennies as opposed to pounds.
With that being said, it is widely accepted that UK penny shares are stocks that are priced at less than £1, and trade outside of the primary stock exchange. Regarding the latter, this means that penny shares are typically traded on the Alternative Investment Market (AIM). In other cases, they will be traded on the OTC (Over-the-Counter) markets.
Either way – penny shares are usually very small companies that are yet to establish themselves. This might be because they were recently launched or their underlying business model is unproven. This subsequently means that the opportunity for growth is significant. That is to say, if the penny share company in question is able to one day float on the London Stock Exchange, it is likely to see its stock price rocket.
However – and as is the case with all investment streams, penny shares also come with their risks. As we explain in more detail later, penny shares are highly volatile and suffer from low levels of liquidity. This means that you stand a much greater chance of losing money in comparison to strong, stable, and established blue chip stocks. It is also not uncommon to see your penny shares increase in value, only to then struggle to find a buyer to take them off your hands.
Why Invest in UK Penny Shares?
Still not sure whether a penny shares investment is right for your long-term financial goals? If so, below we list some of the main reasons why UK investors turn to penny shares.
Put simply, people invest in penny shares because they think that they stand the chance to make substantial gains. Make no mistake about it – if you are able to pick a penny share that subsequently goes on to make it big – you could be looking at 4-figure percentage returns. But, most penny shares do not achieve this feat – so where there are rewards there are also huge risks.
Nevertheless, it’s worth looking a quick penny share success story in order to see just how significant growth can be for those that make it.
ASOS – From Penny Share to Multi-Billion Pound FTSE Company
Launched in 2000 – ASOS is a popular online clothing business that serves the UK and international markets.
- After just one year of trading, the company was admitted to the AIM. At the time, it was valued at just £14 million.
- This amounted to a stock price of just 24p – meaning that it matched the criteria of a UK penny share
- To meet the firm’s substantial growth rate, ASOS then made the transition to the London Stock Exchange
- In early 2018, ASOS hit all-time highs of 7,556p per share
- This represents growth of over 31,000%
- As such, had you invested £1,000 into ASOS penny shares back in 2001 – your investment would have been worth in the region of £310,000
Although ASOS shares have since dropped off from their 2018 highs, the company is still worth over £3 billion.
Low Barrier to Entry
An additional reason why UK investors turn to penny shares is because of their low barrier to entry. That is to say, the cost of a single share is so low that you stand the chance to purchase a substantial number of stocks. Let’s take ASOS as a prime example. At an initial listing price of just 24p – a £1,000 investment would have got you 4,166 shares.
At the other end of the spectrum, the likes of British American Tobacco have a current listing price of 2,785p – meaning that your £1,000 investment would get you just 37 shares. As such, if the penny share company does make it big in the future, you stand the chance of holding a much larger number of stocks in the firm.
So Many Penny Shares to Choose From
Unlike FTSE 100 shares – which as the name suggests is capped to just 100 companies, there are hundreds of penny shares to choose from in the UK. For example, the AIM lists over 850 different companies from a wide variety of sectors and industries.
You then have over 600 companies that constitute the FTSE All-Share Index – many of whom fall within the remit of a penny share. As a result, this allows you to diversify across dozens of different penny shares. In theory, you only need one of your picks to make it big to see healthy returns.
The 5 Best Penny Shares to Buy in the UK
In this section of our guide, we are going to look at some of the best penny shares currently trading in the UK. As noted above, there is no hard-and-fast-rule as to what constitutes a penny share. But, with the general consensus being that penny shares must be valued at less than £1, this is the criteria that we will be using!
Here are the best penny shares to buy now in the UK.
1. Macfarlane Group PLC – Packaging and Labelling
Macfarlane Group is a UK-based packaging and labelling company. Although this might not sound like the most glamorous of industries to be investing in, the stocks have been performing well over the past few years. Best of all, it still sits firmly within the threshold as a penny share.
For example, these penny shares were priced at just over 41p in mid-2015. Before the COV-19 pandemic came to fruition,. the very same shares were priced at 110p. This represents growth of 168%. However – and much like the rest of the UK stock markets, Macfarlane Group shares have since dropped off.
With that said, they are still holding strong at 81p as of July 2020 – so there is always the potential that its upward trajectory is back in action. After all, the firm arguably operates in a ‘staple’ industry, meaning that its products will always be in demand irrespective of how the wider UK economy is performing.
2. Idox Group – Specialist Software
Idox is a UK company that specialises in digital solutions. Serving customers both in the UK and internationally, the firm now employs over 600 people and operates in 8 countries. In terms of its status as a penny share, Idox stocks are currently priced at just 49p.
With that said, at a market capitalization of over £217 million, this particular penny share is growing at a very healthy pace. For example, Idox shares were priced at just 12p back in 2000. This represents growth of 308%.
However, there could be much more to come from Idox – especially in the medium-term. For example, a good target could be its prior all-time high of 74p. If it is able to achieve this geat, this would represent growth of 51% based on current prices. This makes it one of the best penny shares to buy now.
3. Maestrano Group – Cloud Computing
Maestrano Group is a relatively new British company that is looking to revolutionize the cloud computing space. For those unaware, cloud computing is a cutting-edge technology that is expected to dominate the future of how we communicate with and store online data.
Maestrano Group itself services small-to-medium business. In terms of its shares, Maestrano Group only went public in mid-2018. Back then, you would have paid 15p. The shares then went on a downward trajectory – hitting lows of just 1p.
However, it appears that Maestrano Group’s business model is finally obtaining the attention of investors – with its share price now hovering above 8p. From is 52-week lows of 1p, this represents growth of over 800%.
4. Verditek – Solar Panels
Verditek is a self-proclaimed clean technology company that specializes in solar energy. The firm services the domestic housing market, as well as military campsites. As a relatively new organization, Verditek is currently looking at a valuation of just £37 million.
As such, you still stand the chance to catch this company while it is young. In terms of the current outlook, Verditek is having a tremendous 2020. In fact, it was virtually unscathed by the COV-19 pandemic, which is welcome news for investors.
At the start of the year, Verditek shares were priced at just 3.50p. At the time of writing in July, the same penny shares are priced at 12.8p. Although at first glance this might not sound like a lot, this actually represents growth of 265% in just 6 months of trading.
5. Powerhouse Energy Group – Solar Panels
Another penny share company that is heavily involved in the sustainable energy arena is that of Powerhouse Energy Group. The firm is behind cutting-edge technology that has the potential to generate clean energy from burgeoning waste.
As governments around the world continue to be pressured to increase their focus on green technologies, Powerhouse Energy Group could be one to keep an eye on. In a similar nature to Verditek, not only has Powerhouse Energy Group enjoyed a fruitful 2020, but its shares have been unaffected by the wider COV-19 pandemic.
The stocks started the year at just 0.42p per share. At the time of writing in July, the shares are priced at 3.52p. This translates into staggering growth levels of 758% in just 6 months, making it one of the best penny shares to buy now.
Penny Shares Tips
If you’re a beginner investing in penny shares for the first time, it’s helpful to have some pointers and advanced before you put your money on the line.
It is important to remember that very few penny shares will make it big. After all, you will often find that the company in question is behind an unproven business model, so there is never any guarantee that they will be successful. With this in mind, below we discuss some handy penny shares trading strategies that can help you mitigate the risks in the long run.
Here are some of the top penny shares tips for 2020.
Diversification if Crucial
Without a doubt, the most important penny share strategy that you should consider is that of diversification. Put simply, diversifying in the stock markets means that you invest in stocks for heaps of different companies, as opposed to being overexposed to a select few.
Furthermore, an effective diversification strategy will see your basket of shares come from a wide range of sectors and industries. This is extra important in the penny shares space, as you will often find that the firm’s underlying business model is focused on a new and untested product or service.
This includes the previously discussed Powerhouse Energy Group and Maestrano Group – who operate in the innovative spaces of waste-to-energy and cloud computing, respectively.
To help clear the mist, below we outline an example of how you can diversify in the penny shares arena.
- You have £2,000 to invest in penny shares
- You want to diversify as best as you can, so you buy penny shares in 200 different companies
- This means that your maximum exposure per penny share is £10 (£2,000 / 200 companies)
- These 200 companies will come from heaps of sectors – including but not limited to renewable energies, cloud computing, blockchain technology, medical cannabis research, and online retail.
As you can see from the above, the most that you can lose per penny share is £10. On the other hand, if you were fortunate enough to pick a stock that followed a similar path to ASOS (31,000% growth) – your £10 investment would be worth £3,100!
Look to the Distant Future
As we have discussed throughout our guide, the overarching objective when investing in penny shares is to pick a stock that has the potential to ‘make it big’. However, ff your chosen penny share is able to achieve this feat, this likely won’t be the case for many, many years.
Once again going back to ASOS, nobody could have predicted back in 2001 just how popular the online retail space would become with consumers. In other words, buying clothes online wasn’t really a thing back then. But, today, the online sector is slowly but surely catching up with traditional high street shops.
As a result, the only people that would have invested in ASOS back in 2001 were those that envisioned a future of online fashion. With that in mind, spend some time thinking about what sectors and niches you believe will play a major role in the next 10-20 years.
This might include:
- Renewable Energy: Many would argue that it is all-but-certain that renewable and clear energies will lead the way within the next few decades. More and more countries around the world have – especially those in Western Europe, committed to net-zero emissions by the year 2050. As such, it is worth looking at what penny shares are active in this particular space.
- Blockchain and Cloud Computing: When it comes to digital solutions, both blockchain and cloud computing are two technologies in particular that look certain to play an active role in the future. The two technologies are still super-new, so don’t expect to see anything take off in the next few years. But, taking into account the many solutions that both blockchain and cloud computing offers for businesses of all shapes and sizes – it could be a shrewd move to enter the industry while it is still in its infancy.
- Pharmaceuticals: While pharmaceutical stocks like AstraZeneca and GlaxoSmithKline are multi-billion pound companies, there are heaps of penny shares active in the space, too. These are typically small organizations that are looking to discover treatments to a particular illness or disease. If and when the company in question is able to do this, growth could be substantial.
The above sectors are just a select few to consider. The most important thing is that you get into the habit of performing in-depth research on a penny share and consider where the company might be in the next 10-20 years!
Keep Your Stakes Low
One of the most important things to remember when investing in penny shares is that you should keep your stakes low. Sure, there have been numerous success stories where companies have seen their share price increase by 3 or 4-figure percentages in a matter of years.
However, there are also a significant number of example of firms losing surplus of 90% in share value. Unfortunately, this is just the high-risk nature of the UK penny shares arena. With this in mind, it is crucial that you keep your total stakes low. In fact, it would be unwise to allocate more than 10% of your wider investment portfolio into penny shares.
What are the Risks of Penny Shares?
Before buying penny shares in the UK, you need to have a firm understanding of the many risks that you will face.
First and foremost, penny shares can be highly volatile. While there are many examples that illustrate just how volatile penny shares can be, let’s look at Catenae Innovation PLC. The firm in question is involved in the blockchain technology space and the chart below is based on its share price over the past month.
As you can see from the above, the penny shares started the month at 2.60p. A couple of weeks later, the shares stood at 6.85p. This represents a positive swing of 163%. At the end of the one-month period, the shares were priced at 4.07p. This represents a negative swing of 40%.
These upward and downward movements are incredibly volatile. In the traditional blue chip stock space, FTSE 100 shares rarely move by more than 1-3% in a day of trading.
An additional risk that you need to consider when investing in penny shares is that of liquidity. Major companies on the FTSE 100 have multi-billion pound market capitalizations. But, in the case of penny shares, this might be just a few million. As a result, this can make it very difficult to transact.
Furthermore, and perhaps most importantly, while you might find it easy to buy your chosen penny shares, this might not be the case when it comes to selling. For example, it is all good and well seeing your penny shares increase by 400% in the space of a week, but if you are unable to offload them you might not be able to realize your profits.
Lack of Information
When you buy shares in FTSE 100 stocks, rest assured that everyone is on a level playing field. By this, we mean that information released by the company is always done through the public domain. As such, it doesn’t matter if you have 1 share or you are a majority stockholder – everyone is accustomed to the same information at the same time.
Failure to do this would result in significant fines and sanctions for the company in question. However, the rules surrounding information are much laxer in the penny shares arena. This can make it difficult to know how the company is actually performing.
Pump and Dumps
Leading on from the previous point on low liquidity and high volatility levels – this is a highly conducive receipt for pump and dumps schemes. For those unaware, this is where a group of unsavoury characters collectively agree to buy shares in a particular stock at pre-determined intervals.
The overarching goal is to artificially increase the value of the shares, so that outside investors unwittingly jump on the bandwagon thinking they are investing in the next big thing.
However, as soon as the stocks get to a certain price, the pump and dump outfit will proceed to offload their shares. In turn, this will see the value of shares capitulate – leaving victims of the scam with significant losses.
Best Places to Buy Penny Shares in the UK
So now that you know both the benefits and risks of investing in penny shares, we now need to discuss the best stock brokers active in the space. With so many to choose from, it can be time-consuming to find one that best meets your needs. After all, not only do you need to ensure that the platform offers penny shares, but you also need to look at metrics like fees, commissions, payments, and regulation.
With that in mind, below you will find a selection of popular penny share brokers that are active in the UK market.
1. eToro – Leading Social Trading Broker With No Commission
eToro is an online share dealing platform that is popular with those that have little to no experience of stocks. The platform is home to over 800 shares across 17 UK and international markets. This includes over 300 UK-based companies – many of whom fall within the definition of a penny share (less than £1 per stock).
In terms of pricing, eToro is a market leader. This is because you can buy penny shares online in the UK without paying any dealing fees. This commission-free offering also extends to ETFs. There are no monthly or annual fees to consider either, as this is something that other competitively-priced brokers in the space implement. The only fees that you need to consider is a 0.5% currency conversion charge when you make a deposit, and $5 when making a withdrawal.
eToro is also conducive for investing small amounts and subsequently diversifying into heaps of different shares. This is because you can invest from just $50 (about £40) into each stock. As such, by meeting the minimum deposit threshold of $200 (about £160), you can buy penny shares in four different companies.
One of the best things eToro is that, far from being a regular online broker, it also offers innovative social and copy trading tools. This means you can engage with other users and even copy the entire portfolios of top investors!
In order to get money into the broker, you can choose from a debit card, credit card, or bank account. E-wallets are also supported, including Paypal, Skrill, and Neteller. We should also note that your funds are protected by the FSCS – which covers you up to the first £85,000. eToro is also licensed by the FCA, which in itself comes with a plethora of safeguards.
75% of retail investor accounts lose money when trading CFDs with this provider.
2. Plus500 – Trade Penny Share CFDs
Taking into account just how volatile penny shares can be, an alternative option that is worth considering is that of a short-term stock trading strategy. Put simply, you will be speculating on the short-term value of the underlying shares, as opposed to ‘investing’ in them. In order to do this, you will need to use a CFD trading platform like Plus500.
The provider offers over 2,000 stock CFDs – alongside thousands of other financial instruments. This covers heaps of stock exchanges both in the UK and overseas. The main benefit of using Plus500 is that you will have the option of going long and short. This means that you can speculate on the penny share CFDs going up or down.
Additionally, Plus500 also allows you to apply leverage on your trades. If you are a UK retail trader, this stands at a maximum of 1:30. Stock CFDs, however, are capped at 1:5 – as per ESMA regulations. Best of all, you will not need to pay any trading commissions at Plus500, so it’s just the spread that you need to keep an eye on. This is important when access instruments from within the penny share CFD space, as spreads are typically much wider than those listed on the FTSE 100.
If CFD stock trading is something you are interested in, Plus500 accounts can be opened in minutes. You will need to deposit at least £100 to get started, which you can via a debit card, credit card, bank transfer, or Paypal. In terms of licensing, Plus500UK Ltd is authorized & regulated by the FCA (#509909). Another benefit is that Plus500 offers an excellent penny shares app for trading CFDs on your mobile.
- Commission-free CFD platform – only pay the spread
- Thousands of financial instruments across heaps of markets
- Retail clients can trade stock CFDs with leverage of up to 1:5
- You can short-sell a stock CFD if you think its value will go down
- Takes just minutes to open an account and deposit funds
- CFDs only
- More suitable for experienced traders
80.5% of retail investors lose money trading CFDs at this site
How to Buy Penny Shares in the UK
Like the sound of investing in penny shares, but not too sure where to start? To help you along the way, below you will find the steps required to buy penny shares online in the UK with eToro.
Step 1: Open an Account and Upload ID
First and foremost, head over to the eToro platform and elect to open an account.
Provide some personal information, such as your:
- Full Name
- Home Address
- Date of Birth
- National Insurance Number
- Contact Details
You will then need to upload a couple of documents with the review of verifying your identity. This includes:
- Passport or driver’s license
- Proof of address – Utility bill or bank account statement
Step 2: Deposit Funds
You will now be asked to make a deposit. Supported payment methods include a debit/credit card, e-wallet, or bank account. Minimum deposits start at $200 (about £160) and you will be charged a 0.5% currency conversion fee.
Step 3: Buy UK Penny Shares
eToro lists over 800 stocks from 17 UK and international markets, so it’s best to search for the specific company that you wish to invest in. In our example, we are searching for ‘Assura’.
As you can see, the value of Assura shares stands at 77p – which falls within the definition of a penny stock. Next, we need to click on the ‘Trade’ button.
You will then see a pop-up box that requires you to enter details about your penny share purchase. All you need to do is enter the amount that you wish to invest. This is in US dollars and not British pounds.
Finally, click on the ‘Open Trade’ button to complete your penny share investment.
UK penny shares will not be for everyone. While the rewards are potential astronomical – as are the risks. Therefore, you should ensure that you have a set of safeguards in place before taking the plunge. As we have discussed – this should include a strategy that focuses on diversification and small stakes. In doing so, you stand the best chance possible of mitigating your risks in the long run.
If a penny share investment is what you are looking to execute today, it might be worth considering eToro. The FCA-regulated broker allows you to instantly deposit funds with a UK debit/credit card or e-wallet, and it offers all of its shares on a commission-free basis.
Simply click on the link below to get started with a penny share purchase now!
eToro – Buy the Best Penny Shares with No Commission
How are penny shares defined in the UK?
The general consensus is that penny shares are stocks that have a value of below £1.
What exchanges are UK penny shares listed on?
The vast majority of UK penny shares can be found on the AIM. With that being said, the sub-£1 definition of penny shares means that you will find a select number on the main London Stock Exchange. In other cases, penny shares are also traded on the OTC (Over-the-Counter) markets.
Do penny shares pay dividends?
In the vast majority of cases, no - penny shares do not pay dividends. After all, penny share companies are typically new and unproven - so they do not have the financial means to distribute dividends. Instead, all revenues are re-invested back into the company.
How do I sell penny shares in the UK?
You will need to sell your penny shares back to the brokerage platform that you used to buy them.
What is the minimum amount I can invest into a penny share?
This will vary from broker-to-broker. In the case of eToro, you can invest from $50 (about £40) into each stock. This means that a $5,000 investment would allow you to buy penny shares in 100 different companies.