There are many investment tools in Indian stock exchanges and one of them is penny stocks. Penny stocks are those which trade at very low price and have low market capitalization. Usually, these stocks are mostly illiquid and carry high risk. These stocks have prices below Rs 10 and have a market value less than Rs 100 crore. Of course there is no fixed price range and you can also expand the range up to price of Rs.100 to consider a stock to be penny stock.
Trading in stock market is itself risky but the amount of risk in case of penny stocks is more. Penny Stocks are considered highly risky due to factors such as: lack of liquidity, smaller number of shareholders, large bid-ask spreads and limited disclosure of information.
Investing in penny stocks can either give you profit or it can result into a substantial amount of loss. Penny stocks with strong business models and good fundamentals have the potential to become multi baggers in the long run. When it comes to Penny stock investing , identifying the right stock is the key, some good quality stocks in that space are also present and? have potential to become future multi-baggers, they are in the penny space because they? have somehow managed to stay under the radard.
When FY18 began, it was known that there were over 1,800 stocks on the BSE, which were trading below Rs 10 and have delivered up to 20,000% return over the past seven years.
Usually small investors who adapt this platform believe that a stock trading at Rs 3 has higher chance of becoming Rs 30 – giving over 10 times return, in comparison to the stocks quoted at Rs 300 which they find it harder to become Rs 3,000.
PROS of penny stocks:
- Price: Someone who doesn’t want to invest huge sums in stocks, Penny Stocks are an appealing proposition for them. The low cost of penny stocks lets you invest without tying up huge amounts of money, which is good for people on a budget.
- Quantity: Due to the low market price of these stocks, the investors are able to buy large quantities of penny stocks.
- Return Potential: Penny stocks have a greater return potential if the investor is able to choose a good penny stock than do higher-priced stocks in more established companies. Many penny stocks have turned out to be multi-baggers for their investors.
- Quick Money: These stocks are able to make explosive moves. There are a number of penny stocks which has given multiple times returns in just a few months.
- Not Much Information: Retail investors generally do not have information about these stocks and due to low market capitalization institutional investors do not invest in these companies. Therefore, if the investor finds one such stock before the market does, then it can turn out to be a great wealth creator for them.
CONS of penny stocks:
- High Risk: High returns always entails high risk. Penny stocks are extremely risky speculative investments. Even though the return potential is high, the low price of a penny stock often reflects the fact the company is in distress.
- High volatility: Penny stocks are highly volatile in nature. As they are traded in small lots among a handful of investors, which can exaggerate price swings.
- Lack of Regulation: Any regulatory body does not govern penny stocks the way it does other stocks. As the companies are not listed on any major stock exchanges, a lot of unfair and fraudulent trade practices can be carried out while trading penny stocks.
- Prone to scams: The low-priced, thinly-traded minimally regulated and unfamiliar to most investors nature of penny stocks makes them the perfect tool for fraudulent price manipulation and sham promotions.
- Limited Information: Limited information available to the public about the company. In depth research should be conducted to ensure that the information about the stock is real and is not part of any marketing fraud.
- Price manipulations: Price manipulation can be easily done in penny stocks by buying large quantities. There have been a number of cases where insiders try to inflate the share price.
How to invest in penny stocks:
Investing in penny stocks is not everyone?s cup of tea. Here are the few guidelines that can help you to invest in penny stocks.
- Look for value, not just the price: Penny stocks are available at a relatively low share price which would tempt investors to buy in such stocks. One should not think how many shares they are getting, but what value these stocks offer. An investor should assess how good such a stock is before investing in such stocks.
- Study the company?s fundamentals: It is important to examine their financial health of such companies before investing, though it may be hard to find as not much information is available. Look at the financials, management, debt etc.
- Check the liquidity: Invest in stocks that have reasonably high trading volumes so that there is ample liquidity. Penny stocks which have low trade volume, it would be difficult to sell as there might not be any buyers.
- Promoter?s share and pledge: Check the promoter?s shareholding patterns and stock pledge if any.
- Invest only a small portion of your investment in penny stocks: As these stocks have a high risk, you should not invest more than 10% of your total investment amount in penny stocks. Invest only what you can afford to lose.
- Monitor continuously: Penny stocks are very volatile and are known to make explosive moves, therefore monitors these stocks continuously. If the stocks are performing good, buy more. If they are continuously performing poorly, get rid of it.
- Do not diversify: As you are only investing a small proportion of amount in these stocks, diversifying will make the net investment even smaller. Select and invest in only 2 or 3 penny stocks.
- Be disciplined: If your penny stocks start performing tremendously good then do not invest all your money in it. Similarly, do not quit if one or two of your penny stocks failed to give satisfactory returns.
- Do not believe ?it cannot go down any further? myth. If the prices of the stock are falling, try to know the reason behind it.
Here is a list of few stocks. This is for your reference only and not a recommendation to invest in these stocks. You have to do your own research to find out the best value stocks.
Penny stocks could be a wealth creator or wealth destroyer. There are many people who have created huge wealth while the wealth of many investors is destroyed by investing in penny stocks. The common factor among the microcap and smallcap stocks is earnings growth that have turned out to be multibaggers. Look for stocks where there is potential for growth.
Before investing in penny stocks, do your research carefully and do not speculate about the stock, and finally do not invest more than 10% of your portfolio in Penny stocks.