What are Penny Shares?
Penny shares, sometimes known as penny stocks, are a particular type of share that has a low price - typically less than £1.
Penny shares are regarded as high risk investments despite their low cost, simply because their value can fluctuate dramatically over short spaces of time. This is precisely the reason that investors are interested in penny shares - large volumes of such shares can make significant profits, though it must be noted that they can also make significant losses.
There are no real boundaries with regards to what value shares can be called 'penny shares'. Most investors and industry analysts will use the market capitalisation of the listed company (usually referred to as the market cap) to give an accurate determination of the company's ultimate worth.
If the market cap is less than £100 million, the company can generally be said to have penny shares. These companies fall into the microcap or small-cap classification (meaning that they are at the small end of the listed company scale).
In essence, penny shares are of interest to investors purely because their present low cost may rapidly increase in value in a small amount of time. These types of shares are very different to the more reliable types of shares, known as blue-chip, which do not give investors huge profits over small periods but will remain relatively stable despite industry changes and the economic climate.
Penny shares, being that they are so much riskier than blue-chip shares, tend to be traded by professional investors and by people who accept the risks of the potential financial losses involved in the industry.