I've been told that squats would be a good way of building up muscles in my knees as they aren't great at the moment. I have been doing squats and either use no weights at all or I do them while holding a 5Kg medicine ball. Is this safe to do or is it not recommended?
If you are holding the medicine ball in front of you, what you are doing is a form of goblet squat. A goblet squat is very good for your body, and provides a good core component to the squat as well.
The important components of any squat are:
The purpose of going below parallel is to strengthen the posterior chain. It gets your hamstrings and calf muscles involved, preventing strength imbalances between the front and back of your legs. This of course, is what strengthens the knee.
Don't be afraid of increasing the weight you do beyond 5kg. You can use kettlebells or dumbbells to get heavier weights on the goblet squat. Eventually, you can graduate to back squats or front squats for even stronger knees and core. Just make sure your increases are around 5-10lbs (2.5-5kg).
If you are doing goblet squats with a medicine ball (you can also use a dumbbell or kettlebell) then I would highly recommend using goblet squats to help you perfect your squat technique.
Here is a great resource on goblet squats: http://www.t-nation.com/free_online_article/most_recent/goblet_squats_101
In a nutshell, it's much harder to have bad form doing a goblet squat than a "regular" squat because the positioning of the medicine ball/kettlebell/dumbbell forces you to brace your core, keep upright, hinge from the hips, etc.
The reason why this is important is that it's not uncommon to see people in the gym attempting "regular" barbell squats but with outrageously bad form. Some of the most common ways that people butcher squats include the following:
A lot of these common errors mentioned above can be remedied by practicing proper squat form with goblet medicine ball squats.
Also, make sure you keep you weight on your heels during the entire squat movement, and you initiate both the up & down movements with your hips first, not your knees.
A fun variant is to extend your arms forward at the bottom of the squat, holding the medball or weight away from you at shoulder height with straight arms. Then you can bring it back in to your chest when you stand or keep it away from you as you stand. This is a great way to add more challenge without needing a lot of extra weight for lifting.