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What are penny stocks?

What are penny stocks?
Image source: Getty Images.

All British stocks have to be made up of pennies, right? They have a monetary value, after all. 

Even the London Stock Exchange Group‘s share price – one of the highest in the FTSE 100 according to, well, the London Stock Exchange – is made up of pennies (just under eight thousand of them at the time of writing).

But this isn’t classified as a penny stock (or penny share).

What exactly are penny stocks?

The difference between penny stocks and penny shares comes down to semantics. And perhaps geography!

But essentially, if a listed company’s shares trade for less than US$5 then it’s regarded as a penny stock. And over on this side of the pond, if an equity’s share price sits under £1, it can be deemed a penny share. Don’t worry about the ever-changing value of currency – this definition is well set!

As I write, the high-street chain and household name Lloyds Banking Group‘s shares are valued at around 40p each. So, despite having a market cap of almost £30 billion, it falls into the category of a penny share!

(And since ‘stocks’ and ‘shares’ tend to be interchangeable in today’s investing language, you’re unlikely to get picked up on if you call Lloyds a penny stock.)

Can you get rich from penny shares?

Possibly. But you can also ‘get poor’, too.

There’s a stigma around the term, and this comes from the fact that they are frequently traded. (I’ll repeat: traded, rather than invested in.)

Because many can be bought in large quantities due to their seemingly cheap individual price, they are seen as more accessible to day-traders (as opposed to shares in Amazon, for example, which are currently available for around £2,200 each!). 

This causes share-price volatility, and often wild swings in value on a day-to-day basis. So a beginner might be ‘up’ on their investment one day, and ‘down’ the next.

A lot of the time, shareholders of penny stocks are at the mercy of other investors’ actions – rather than the market largely reacting to the company’s prospects.

That’s not to say all penny shares will turn out to be bad investments, of course. Looking at ASOS, its share began life with a price of a little under 25p each. These days, they’re worth over £50 per share!

If you’re new to investing, then do take a look at our list of top share-trading accounts for beginners. And if you’re more experienced, as well as prone to buying and selling shares more regularly, then you might be interested in our top picks for some of the best low-cost, cheap share-dealing accounts around.

Whatever you do, though, I encourage you to invest Foolishly, not foolishly!

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