The definition of 'Penny stock'

What are penny stocks?

Penny stocks are securities that typically trade outside of the major market exchanges at low prices.

In the UK, these are generally traded on small-cap indexes such as the FTSE Small Cap or the AIM All-Share and due to their nature are prone to volatile changes. This means that they have a high potential reward - up to ten times your money and more according to this article in This is Money - but are also high risk.

In the UK, penny stocks are defined as stocks priced under £1, whilst recent changes in the USA mean that penny stocks are shares trading at $5 or less.

It is key to remember that the risk factor is significant with penny stocks; in many cases they trade infrequently so can be difficult to shift once bought, have been implicated in major scams and often have limited liquidity.