What are penny stocks?

A 5p share is not cheap. That single misunderstanding is where most of the appeal of penny stocks comes from — and unpicking it explains most of what goes wrong for people who buy them.

By Nathan Wickham-Hurd · Founder, Oak Growth · First-class Economics & Finance, MBA · Last reviewed August 2026

What counts as a penny stock

Loosely, a share trading at a very low price per share — historically under a pound in the UK, under five dollars in the US. In practice the label means a small, often unprofitable company with a low market value, thin trading and little analyst coverage. Many UK examples sit on AIM rather than the main market.

The misunderstanding at the centre of it

A 5p share is not cheap. Cheapness is about what you pay relative to what a business is worth, and the price per share tells you nothing about that on its own.

Company A: 5p × 2,000,000,000 shares = £100m Company B: £50 × 2,000,000 shares = £100m

Both companies are worth exactly the same. The share price only reflects how the ownership has been sliced up. Buying 20,000 shares at 5p rather than 20 shares at £50 feels like more, but it isn't — you own the same fraction either way.

This is the single most common beginner error, and the entire appeal of penny stocks rests on it. "It only needs to go from 5p to 10p and I double my money" is true — and equally true of a £50 share going to £100. The low price makes it feel more achievable. It isn't.

Why the risks are structurally different

Liquidity

Few buyers and sellers means wide spreads. You may pay 10% more than the quoted price to get in and receive 10% less to get out, before the shares have done anything. In a falling market there may be no buyer at all.

Dilution

Small companies that aren't yet profitable fund themselves by issuing new shares. Every issue shrinks your slice. A company whose share count doubles has halved what each existing share represents, which is why so many small caps drift down for years without any single piece of bad news.

Disclosure

Smaller listings face lighter reporting requirements and often have no analyst coverage, so there is far less scrutiny of what management claims.

Promotion

Low-priced, thinly traded shares are the natural home of pump-and-dump schemes, because a small amount of buying moves the price a long way. Anything arriving as an unsolicited tip deserves the opposite of enthusiasm.

What to check if you look anyway

Some genuinely good businesses are small, and small companies have produced excellent long-run returns for investors who did the work. The work is the point:

Share count over five years

The single most revealing number. If it keeps rising, existing holders have been funding the company rather than owning a growing business.

Cash and cash burn

How long can it survive without raising money? Divide cash by the rate it's being consumed. Under eighteen months means another placing is coming.

Has it ever made a profit?

Not adjusted profit, not EBITDA before exceptional items. Actual profit, and actual free cash flow.

Who owns it

Directors holding meaningful stakes bought with their own money align interests. Directors holding only options do not.

The plain version

Penny stocks aren't a category of bargain, they're a category of risk. The features that make them exciting — low price, small size, big percentage moves — are the same features that make them fail more often. If you want cheap in the sense that matters, look for companies trading below what they're worth, at any share price. See how to find value stocks and what a value trap is.

Cheap means below what it's worth

Oak Growth estimates intrinsic value for roughly 1,000 companies and shows the discount against today's price — a measure of cheapness that doesn't depend on the share price looking small.

Explore Oak Growth

Common questions

What are penny stocks?

Shares trading at a very low price each — historically under £1 in the UK or $5 in the US. In practice the term describes small companies with low market values, thin trading, limited disclosure and often no history of profit, many of them listed on AIM rather than the main market.

Are penny stocks a good investment for beginners?

They are among the hardest places to start. Wide spreads, frequent share issuance, limited disclosure and vulnerability to promotion schemes all work against inexperienced investors, and the low share price offers no protection — it says nothing about whether a company is cheap.

Does a low share price mean a share is cheap?

No. Price per share only reflects how ownership has been divided up. A company with two billion shares at 5p and one with two million shares at £50 are worth the same. Cheapness means paying less than a business is worth, which the share price alone cannot tell you.

Why do penny stocks fall over time?

Most commonly, dilution. Small companies that aren't yet profitable raise money by issuing new shares, and every issue shrinks the fraction each existing share represents. That can produce a long slow decline without any single piece of bad news.

Also see: What is a value trap? → · How to find value stocks → · What is the safest investment? →