High-risk investments

How to make money from penny shares

Most define a penny share by its upper price limit. In the UK, some specialist brokers require a share price of less than £1.00, while others set the ceiling at £3.00.

Whichever way, penny shares are the fun side of investing but, also, unfortunately, its crooked side. Other things being equal, the younger the company in which you invest, the greater the risk.

The investment risks and the rewards are enhanced, not least because penny shares have a thin market. A stock priced at 10p may rise 50% on good news, whereas an old economy blue chip stock will not. Conversely, the penny share can fall more sharply in percentage terms than its larger cousin. Its price at any given time may bear no relation to the stock's underlying value.

A penny stock may prove very profitable if predators are showing an interest. The share price can soar on speculation that there may be a contested takeover bid at a considerably higher value than the current share price.

For such reasons, you will not always buy penny shares on value grounds. You need to be ready to nip in and out of stocks, keeping a sharp eye on share price changes. In addition, you will find some penny shares in which it is worth investing for the longer term.

The choice of markets is large, making a difference to the company's profile, its liquidity, and its expenses. A company may be quoted on the London Stock Exchange's main market or on its Alternative Investment Market. Alternatively, it may be PLUS-quoted. Stocks quoted abroad may be simultaneously trading on the London Stock Exchange