Penny Shares - The Basics of Penny Stock and Penny Share Investing Explained

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Should You Invest In Penny Shares?

Summary: According to the SEC a penny share (or penny stock) is a low priced, speculative security from a very small company.

This description of a penny stock is regardless of market capitalization or whether the company trades on a securitized exchange like NYSE or NASDAQ or an over the counter listing service.

In the UK, a penny share is a listed company that has a market value of less than £1 million and a share price of less than £1 per share, with a bid / offer spread of more than 10%. Note that! A spread of 10% in a FTSE 100 company would be scandalous - it would similar to theft! This shows just how rarely many of these companies will be traded and therefore how illiquid they can be.

Very small companies - including those that qualify as penny shares - can be a very high risk investment proposition.

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Of course, it goes without saying that small companies that are succesful will become larger companies. It is clearly easier for a company with a few offices, shops or branches to double in size (and profits!) than would be the case for a global titan. For very large companies, annual growth rates of perhaps 10% are often considered to be high. It is this potential for fast growth that excites and tempts investors to small companies.

But these investments face many risks - including some that investments in larger firms may not face - which means that they often ought to be considered an investment for those with considerable experience.