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In America, any share with a share price below $1 is deemed to be a penny share. In Britain, though, there is still some confusion as to what exactly a penny share is! Some pundits reckon that any share costing less than £1 should be a penny share. But by using this as a yardstick, Royal & SunAlliance (LSE: RSA), Colt Telecom (LSE: COLT) and engineer FKI (LSE: FKI) would be classified as penny shares. Their share prices are 78p, 57p and 98p respectively. In fact, there are no less than 197 companies, almost a tenth of the UK stock market, with share prices less than a pound. Generally though, any share with a share price below 50p can be thought of as a penny share. Interestingly, there are almost 70 companies with market values in excess of £50m whose share prices are below 50p. These include steel maker Corus (LSE: CS.), which boasts a market value of £1.9b, and Invensys (LSE: ISYS) that is valued at £640m. Woolworths (LSE: WLW), Dimension Data (LSE: DDT) and Eurotunnel (LSE: ETL) would, by this benchmark, also be penny shares. The Financial Services Authority has its own definition. It considers any share with limited liquidity a penny share. In other words, any share that is hard to buy and sell in quantity without affecting the price is a penny share. The FSA has explicitly identified shares with a spread of 10% or more between buying and selling prices. Whilst a formal definition of a penny shares is welcome, the FSA's classification presents interesting problems of its own. For instance, shouldn't the market value of the business have some bearing too? What's more, some shares costing over a pound a piece can be quite illiquid also! That said, the FSA's definition does highlight one of the main dangers of penny shares, namely the difficulty in making a profit from them. For instance, it is wrong to think that penny shares have a greater potential to rise just because they are quoted in pennies. On its own, share prices are irrelevant unless it is used in conjunction with other information about the business. These include earnings and dividends, which go to produce more meaningful measures such as the P/E and yield respectively. Consequently, it's important to judge each share on its merit, which is a much better than blindly buying penny shares. > Find out how to Build A Portfolio
