What are Penny Shares?

Penny shares are shares in a company with extremely low value. Sometimes called speculative or junk shares, these investments usually involve a high amount of risk. When a person invests in penny shares, he or she generally does so in the hope that the company will gradually or suddenly become profitable, at which point the shares can be sold or traded for considerable profit. The reality of a cruel business world, however, indicates that such a phenomenon will happen only rarely.

There are several different types of penny shares that can be incorporated into an investment strategy. Defensive shares are those that may cost next to nothing in a profitable, stable market, because they tend to perform much better in a bad market. Buying defensive shares may be seen as insurance against a poor economic trend. A brand new company may also be a good source of penny shares, since it isn't yet clear how the business will perform; it may turn out to be wildly successful, it may flop in a year. Internet start-ups can be a particularly heart-thumping source of cheap shares, as they usually do not have the assets to secure higher prices initially, yet may provide sudden jumps in value due to a surge of popularity.

The advantages to penny shares are primarily that they are inexpensive to buy, usually costing less than $1 US dollar (USD), and that they have the potential to increase in value. Some investors just learning the market may put small amounts of money in penny shares simply to test out trading styles. Though the risk of losing everything may be high, when a person has only invested $20 USD, the loss is unlikely to result in financial insolvency. Just like playing the lottery, the possibility for increase may be worth the loss in some cases.

Investing in penny shares does carry a variety of downsides, however, that should be carefully considered. First, while they may be easy to buy, penny shares are sometimes difficult to sell or trade. Their low value and association with unknown or poorly-performing businesses make them less liquid than higher valued common shares. Second, while there are almost miraculous success stories of investors becoming millionaires overnight through penny shares, the great majority of these shares end up being nearly worthless. Any investor leaning toward penny shares must be prepared and able to lose any assets invested in this market segment.