Find out why you should be cautious about investing in penny shares or penny stocks, and how to protect yourself if you have invested.
The term ‘penny shares’ usually refers to shares in small companies that are either admitted to public markets in the UK or are unlisted.
Penny shares could make up part of a diversified portfolio for people who wish to invest in a high-risk market, especially sophisticated investors.
However, some stockbrokers use high-pressure sales tactics to sell penny shares to investors, despite the shares not being suitable for everyone.
These shares are often very high risk, can be difficult to sell and may be quoted in pence.
The offer to invest in penny shares often comes from stockbrokers cold-calling investors, after taking their phone number from publicly available shareholder lists.
The high-pressure sales tactics can also come by email, post, word of mouth or at a seminar.
What you need to know about penny shares
Make sure you understand any investment product being promoted to you before you part with your money.
Make sure you know what you are buying and how you can sell the shares.
We strongly advise that you only deal with financial services firms that are authorised by us. You can check the Financial Services Register to make sure they are.
Keep in mind that authorised firms are unlikely to contact you out of the blue with an offer to buy or sell shares.
Be prepared to challenge the advice a broker gives you and ask why a particular share is suitable for you. You should also ask the broker what commission they will get for arranging the sale.
Find out how easy it will be to sell the shares, especially as the market may only have a few buyers willing to take on a certain number of the shares at any one time. If this happens, you may be left holding shares for longer than you expect.
Do not invest any money you are not prepared to lose – remember that penny shares are usually very high-risk products and you could lose all the money you invest.
What to do if you've invested in penny shares
If you're concerned about an investment, you should stop sending money to the firm and individuals involved.
If you've given them your bank account details, tell your bank immediately.
If you invested in penny shares and feel you were pressured into doing so, or did not have the risks properly explained to you, you can make a complaint to the firm that sold them to you.
If you're not happy with their response, you can complain to the Financial Ombudsman Service.