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5 features to know about penny stock trading




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Trading penny stocks is a much-debated endeavour within the financial sector as entry prices are low and volatility is high. This can lead to a lot of differing opinions on whether this is a worthwhile trading selection when there are plenty of others out there with a better balance. Let’s take a look at five features to know about penny stock trading.

Penny stocks in short

Before getting into the key points of penny stocks, it’s important to understand what they are. At a glance, they are shares offered by small public companies, start-ups and similar that are typically at the start of their journeys or experiencing some difficulties. To be defined as a penny stock, these need to be offered at less than £5 (and typically under £1).

Important features

1. There is some solid potential

The companies that offer penny stocks are often young and have the potential to grow and this could potentially see the right moves taking off. For example, if you decide to trade a stock that has a product in an up-and-coming niche and they prove to be successful, the rewards could be significant. On the other hand however, this won’t be a frequent occurrence and plenty of businesses simply won’t get off the ground.

Even less frequently, a more well-established company can fall on hard times and offer penny stocks to regain some capital, so there is potential there if you know where to look for it.

2. Unpredictability

Not only is penny stock trading undertaken in a volatile trading environment as these shares are more susceptible to market moves that can go either way, but there are many more reasons that unpredictability is high in this niche. For one, pricing can be hard to follow and sometimes there isn’t much supporting information when choosing this as a trading style.

3. Fast turnaround times

You won’t have to wait long to see if your trades are successful; there are penny stocks out there that make significant price moves in as little as a few hours. There are businesses that can see success overnight, but also those that can go bust with little warning, so losses can be swift also.


4. Support for trading and leverage

One of the downsides to trading penny stocks is that not many trading platforms will support them and this can make the cost of trading higher. Those that do will typically offer leverage (a loan amount against a small deposit), which can allow for many more trades to be undertaken at any given time. Leveraging can increase the potential for profit, but losses can quickly mount up if a trader isn’t experienced or if risk management isn’t properly implemented.

5. Low costs can have additional benefits

When you can enter a market like penny stocks with little initial funds and make use of leverage, the benefits can be more varied than simply making money. For example, more experienced traders can use these to diversify their portfolios. Trading with a focus on volume instead of cost can be a risk management strategy in itself too, as the potential for losses will be more widely spread.

Risk management

Ensure you’ve carried out extensive research into the market and company you’re looking to trade. In addition to this, trading with virtual cash on a demo account can provide great insight in trading. Making use of stop loss features is also critical to protecting yourself from large losses.

What to consider when trading penny stocks

If you have decided that penny stock trading is for you, it can be a good idea to keep in mind to strike while the iron is hot. As things can progress quickly, if your asset goes down, close your position. There are many trading strategies that can benefit from holding out for a sudden swing in market sentiment, but this isn’t typically the case here. Once interest in a penny stock drops, it isn’t likely to suddenly pick back up again.

It’s also typically advised to follow trends and indicators when using other trading styles and strategies, but penny stocks differ here, too. It’s far better to do your own research and focus on industries you have some knowledge in, than to simply follow the crowd.

There is a lot to consider when penny stock trading and you can click here to read more if you’re still interested and would like to get involved.


Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. The vast majority of retail client accounts lose money when spread betting and/or trading CFDs. You should consider whether you understand how spread bets and CFDs work and whether you can afford to take the high risk of losing your money.

Marketing for CFDs and spread betting is not intended for US citizens as prohibited under US regulation.

Tax treatment depends on your individual circumstances. Tax law can change or may differ in a jurisdiction other than the UK

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