Penny stocks are a bit like the Lotto of the stock market. They are inexpensive stocks – trading under £1 in UK or below $5 in US, though those parameters have broadened a bit. Penny stocks are risky investments because they are often issued by companies that are unprofitable, small or new and unproven. However, the potential reward is high if the company becomes successful.
The small price tag lures investors to penny stocks. Imagine buying a fleet of taxis instead of one limousine – that’s the idea behind penny stocks. Spending £1,000 can give you a large number of shares in a small company with the possibility of hitting it big someday.
Many successful companies once traded at very low prices, but eventually found their true level. The trick with finding good penny stocks is spotting companies that are improving revenue and if not in the black, at least showing a path toward being profitable. Investors must bear in mind, though, that penny stocks carry high risk and only those with significant tolerance for risk should touch them.
We selected five of the best penny stocks in the UK that all trade on the London Stocks Exchange and have sound financials and good growth potential. In our experts’ view, they could generate a significant returns to those willing to take a risk.
See an overview of out top picks below:
Comparing the best penny stocks in the UK
| Ticker on LON | Company | Performance YTD |
| ITV | ITV plc. | +25.56% |
| IAG | International Airlines Group | +9.23% |
| PHE | Powerhouse Energy Group | +305.81% |
| IDHC | Integrated Diagnostics Holdings | -11.11% |
| VOD | Vodaphone | +2.52% |
An in-depth look at these top penny stocks
You can help mitigate the risk that penny stocks carry by conducting thorough research of the stocks you are considering. All five of these UK penny stocks that we selected have the potential to break out due to factors that support their business and long-term potential.
1. ITV plc: Average 10-year annualised return of -7.86%
ITV (LON: ITV) is still struggling financially, but it remains profitable, has erased its pension deficit and it has relatively low levels of debt. In the first quarter, it reported revenue of £887 million ($1.13 billion), down 7% year over year. While ITV Studios revenue dropped, due in part to the impact of the actor’s and writer’s strike in the US, the company saw a 3% gain in total advertising revenue compared to the same period a year ago.
The company expects better numbers in the second quarter as it counts on higher revenue from advertising during the EURO 24 football tournament from mid-June to mid-July, as well as more new TV programme releases in the latter half of the year.
One solid reason to hold onto the stock is it has an above-average dividend with a yield of around 6.7%. The company issues a twice-yearly dividend and paid out a £3.30 per-share dividend in May with an interim dividend of £1.70 expected at the end of the year.
ITV plc is the largest British commercial broadcaster. It holds 13 of the 15 regional television licences that make up the ITV network. The London company’s slow start in streaming has hampered its revenue growth, but it’s attempting to make up for lost time by ramping up its streaming apps. It also owns ITV studios, its programme production business.
2. International Airlines Group: Average 10-year annualised return of -7.51%
International Airlines Group (LON: IAG) owns seven companies, five of which are airlines: British Airways, Iberia, Vueling, Aer Lingus, and LEVEL. The the Anglo-Spanish company also owns IAG Cargo, an air freight and charter network, plus IAG Loyalty, which runs the loyalty programmes of British Airways Executive Club, Iberia Plus, Aer Lingus AerClub and Vueling Club.
A well-established airline operator and a leader in intra-European travel with more than 500 aircraft, IAG is not a typical penny stock, even if it trades for less than £2 a share on the London Stock Exchange and below $5 a share as an over-the-counter stock in the US.
In the first quarter, IAG’s revenue rose 9% from a year earlier to €6.43 billion ($6.95 billion). It made a net loss of €4 which narrowed by 95.4% from the same period last year. The rise was due to strong demand across all of its airlines and growth in operating profit, which totalled €68 million in the quarter, compared with just €9 million in the same quarter a year earlier.
The company also trimmed its net debt in the quarter to €7.44 billion from €9.25 billion. It also saw 4.4% higher passenger revenue per available seat kilometre year over year, thanks to the timing of Easter travel. While leisure travel continues its strong rebound from the pandemic’s effect, business travel has only improved slightly. The airline operator reported string bookings for the second and third quarters.
3. Powerhouse Energy Group: Average 10-year annualised return of 4%
The Chester, England-based startup focuses on turning non-recyclable waste products into low-carbon energy. Powerhouse Energy (LON: PHE) uses distributed modular gasification (DMG) to convert plastics, tires and other items into synthetic gas and hydrogen. With the concerns about global warming, more companies are turning to waste-to-energy sources to lessen their carbon footprint.
It reported a fiscal 2023 loss of £1.43 million ($1.82 billion), after losing £46.2 million in fiscal 2022. Full-year revenue soared 556% from the previous year to £180,959, all from providing engineering services through Engsovle Limited, which became part of the group last June. It should be able to continue to grow revenue as it ramps up projects.
Paul Emmitt, who took over as CEO last year, said he is reorganising the company to be run more like a small business, focusing on more profitable licensing and royalty operations. The company has a number of projects in the works. It is working on a waste plastics to hydrogen generating plant near Ellesmere Port in Northwest England and also has a collaboration with National Hydrogen in Australia to develop waste to hydrogen projects in Australia, Hong Kong, Italy, and Switzerland.
4. Integrated Diagnostics Holdings: Average nine-year annualised return of -14.5%
The consumer healthcare company, which is headquartered in the Channel Island of Jersey, offers diagnostic services with operations in Egypt, Jordan, Nigeria, Sudan and Saudi Arabia. It performs everything from blood glucose tests for diabetes to advanced molecular testing for genetic disorders. It also provides radiology services, such as X-rays and CT scans, through Al Borg Scan in Egypt and Echo-Lab in Nigeria. It has been in business since 1979 and has 601 branches, all in Africa.
In the first quarter, Integrated Diagnostics (LON: IDHC.L) benefited from improved pricing and cost savings initiatives, as well as higher revenue per test and higher test volumes. Revenue grew 28% year over year to EGP 1,171 million (£19.27 million, or $24.51 million) while net profit rose to EGP 402 million, up 139% from the same period last year.
In Egypt, Integrated’s largest market, it had revenue growth of 35% year over year, driven by a 10% rise in test volume and a 23% increase in average revenue per test. Working in Africa can pose challenges, as the company was forced to temporarily close all 18 of its branches in Sudan because of the ongoing conflict there. However, Integrated just opened its first two branches in the Saudi Arabian capital of Riyadh in the quarter.
The markets that Integrated Diagnostics operates in are far from saturated by competitors, so there are plenty of opportunities for growth.
5. Vodafone: Average 10-year annualised return of -12.32%
The telecom company primarily operates in Asia, Africa, Oceania and Europe and its headquarters are in Newbury, England. Faced with growing competition, Vodafone (LON: VOD) has seen its shares fall by 44% over the past five years, which has landed it in the category of a penny stock, despite its large scale, with more than 310 million mobile customers, 18 billion TV customers and 22 million broadband customers.
Vodafone has undergone a major overhaul over the past year, trimming 11,000 jobs while merging Vodafone UK and Three UK and selling its struggling operations in Spain and Italy. The moves have made investors a little more optimistic about a turnaround. While group revenue fell 2.5% to €36.7 billion ($39.7 billion) and net profit for continuing operations fell 87.5% in fiscal 2024 to €1.57 billion, organic service revenue rose 6.3% and core earnings grew 2.2%, led by improved sales in Britain and Germany.
The company also offers a twice-yearly dividend and paid out a total of €9 per share last year, equaling a yield of more than 10%. That dividend will be halved in 2025, the company has said, but that will still have a relatively high yield of more than 5% and will give it more cash for its business. On top of that, it recently initiated a €500 million share buyback program. It’s important to remember that the company is still profitable and is trading at less than 19 times earnings. Considering the value of its assets, it looks to be attractively priced.
What are penny stocks?
Penny stocks are shares of public companies, usually small-cap stocks, that trade for a low price per share. Typically, this is less than $5 per share, though the exact definition can vary by market. They can appear attractive to inexperienced investors because of their low price tag, but penny stocks are also associated with a greater degree of risk than the stocks of more established companies.
While we’ve focused on penny stocks that trade on the London Stock Exchange, many penny stocks trade on smaller exchanges, including the over-the-counter (OTC) market. OTC stocks aren’t subject to the same listing requirements as exchange-traded stocks, which can mean there’s less information about such companies. Even with the penny stocks on the TSX, there is generally less coverage on the stocks by the media or analysts, so investors need to do more of their homework before plunging into buying penny stocks.
It’s also important to realize that penny stocks, because of their low share prices, can be more volatile than other stocks. The prices of their shares can swing a great deal in a short period of time and while that can create an opportunity for investors, it can also mean big losses in some cases.
Pros and cons of investing in UK penny stocks
Here are some of the pros of investing in penny stocks:
Low barrier to entry: Because they trade at low prices per share, you can buy a large number of shares with a relatively small investment. This allows you to magnify potential gains if the stock price increases. Penny stocks also make it easier for beginning investors to try out the market.
High Potential Returns: The biggest reason to consider penny stocks is their potential for explosive growth. A big company on the precipice of a comeback or a small company on the cusp of being profitable could see their stock prices rise, leading to significant gains for investors.
Under-the-Radar Gems: Sometimes, promising young companies with bright futures trade as penny stocks before they gain mainstream attention. This can be particularly true of technology stocks. By doing your research, you could potentially uncover a hidden gem before it takes off.
Hedging Potential: Penny stocks in certain industries can act as a hedge against broader market downturns. For example, penny stocks in the natural resources sector might rise in price if there’s a downturn in the technology sector.
There are, however, considerable risks in investing in penny stocks:
High Volatility: There’s a reason many people advise against penny stocks. They are known for their wild price swings. Even positive news can cause their prices to jump dramatically, but negative news or a lack of trading activity can send them crashing. This volatility makes it hard to predict their future value and exposes you to the risk of significant losses.
Fraudulent Schemes: Penny stocks are often a prime target for pump-and-dump schemes. In these scams, fraudsters artificially inflate the price of a stock through misleading promotions and then quickly sell their shares at a high profit, leaving unsuspecting investors holding worthless stock.
Lack of Information: Penny stocks are often issued by small companies with limited public information available. This makes it difficult to research the company’s financials, business model, and future prospects. Without proper research, you’re investing blindly.
Struggling Companies: Many penny stocks have limited track records or have a history of losses. These companies may be using unproven technologies, lack a clear path to profitability, or face significant challenges in their industry.
Penny stocks FAQs
How to invest in penny stocks in the UK
First, check to see if your brokerage account will allow you to trade in penny stocks as some put limits on penny stocks or charge extra fees for penny stock trades. Make sure the stock is registered with the proper regulators to avoid unregistered scams.
As with any stock, but even more so, you need to do your own research on a penny stock, looking at a company’s earnings reports going back a few years. Make sure the company is on solid financial footing and appears to be headed in the right direction. Be especially cautious at first. It’s tempting to buy large blocks of shares of penny stocks because they’re inexpensive, but it makes sense to proceed slowly with smaller buys at first because of the volatility around penny stocks.
Are penny stocks a popular investment?
Penny stocks are generally not popular with established investors or with financial advisors because of the risks they pose. The potential for pump-and-dump schemes is higher with stocks with low price shares, because it doesn’t take as much to influence a stock.
They are, nonetheless, popular with investors who are looking for high potential share price growth and have high tolerance for risk. There’s also the concern that the low volume that is typical of penny stocks could make it harder for investors to sell their shares down the line, even if the stock does rise. Sadly, most penny stocks don’t appreciate in share value all that much, though there are exceptions.
Do I need to pay tax on penny stocks in the UK?
Generally yes. Consult a tax professional regarding your specific situation, but there are two types of taxes affecting penny stocks in the UK, Capital Gainst Tax (CGT) and Stamp Duty Reserve Tax (SDRT).
The CGT applies to profits made when selling stocks outside of tax-efficient accounts like ISAs or SIPPs. The amount of tax owed depends on your income tax bracket.
The SDRT is a 0.5% tax paid when buying UK-listed stocks, which is not applicable for most overseas shares or exchange-traded funds (ETFs).
Tax-efficient accounts like ISAs and SIPPs shelter your investments from taxes like CGT. However, SDRT might still apply to non-UK holdings within these accounts.
Methodology: How we made our picks
There are plenty of UK penny stocks, but not many of them have a clear path to profitability. We focused on UK stocks that were under £1, or just slightly above that threshold, a share on the London Stock Exchange or below $5 a share on an exchange in the US. Then we focused first on more established companies in the midst of a potential turnaround such as ITV plc, International Airlines Group or Vodafone. The thinking was that, as larger companies, they had more managerial experience and more economic wherewithal to return to profitability. Lastly, we included one promising startup, Powerhouse Energy Group, because its waste to hydrogen technology is expected to be in demand as countries strive to achieve zero net emissions goals.
References
ITV plc first-quarter earnings report
International Airlines Group first-quarter report
Powerhouse Energy Group’s yearly report
Proactive story on Powerhouse Energy Group’s strategic plan
