If you are interested in investing but don’t want to risk large amounts of money until you’ve learnt the ropes, penny stocks might be an option to consider. Here is a quick guide to penny stocks:

What are Penny Stocks and how do they work?

Penny stocks are low-cost and small-cap stocks. Although they are called penny stocks, this is a misnomer and they rarely cost a penny. The word ‘penny’ is used simply to indicate their low price. However, the low price does not imply that these stocks do not have potential for growth. They are more volatile compared to conventional stocks but also offer excellent potential for returns.

The best place to trade penny shares in the UK is the AIM or the Alternative Investment Market.

What should you know about Penny Stocks?

Penny stocks usually cost below £3. Penny stocks tend to be low profile as big fund stock brokers usually prefer trading with high profile company names. But the truth is that penny stocks can be an excellent way to grow your money in a shorter time compared to shares of well-known companies.

As a matter of fact, a lot of international companies started out as small, insignificant names.

How to buy and sell penny stocks

• You buy and sell penny stocks exactly as you would for more expensive shares of stock. You might need to first find a broker and then open an investment account
• Read message boards and research small companies. There are plenty of examples of penny stock companies that have gone on to become power stock companies. Such stocks have a return rate of above 1000%.

Look out for companies that have a sound financial background and pay special attention to the product or service. You have to lookout for companies that combine promise and a low share price.

Types of Penny Shares

Penny stocks fall into 4 broad categories:

Young shares: Penny stocks are usually offered by companies that have a short operation history or have been declared public in recent times.

Recovery shares: These are companies that have for some reason experienced devaluation of their shares but still have potential for turnaround.

Cyclical shares: The cost of cyclical shares fluctuates with the economy. Investors buy during a downturn and sell during an upturn.

Defensive shares: These shares tend to stay afloat even during difficult times. Common examples include public utilities and food.

The good news about Penny Stocks is that you don’t need a big sum of money to start investing. Penny stocks are an excellent option for beginning investors as you can start investing while incurring minimal risk.

Have you any tried and tested tips for dealing in Penny Stocks? Share them with us in the comments below!