What are Penny Stocks? And Should You Invest in them?
A complete overview of Penny stocks in India: Hello Investors! Penny stocks are the darlings of new investors. The low market price of these stocks makes them quite attractive to beginners. However, there are a number of things that an investor should know before investing in penny stocks. In this post, we are going to discuss penny stocks, their pros and cons, and whether an investor should buy it or not. Let’s get started.
What are Penny stocks?
Penny stocks are those stocks that trade at a very low market price, generally with a share price less than Rs 10. These stocks have a very low market capitalization and typically under Rs five hundred crores. Further, penny stocks in Indian stock market have low liquidity and are speculative in nature.
Being smaller than Small-cap companies, these stocks belong to the microcap category. However, you can find a number of penny stocks in India listed on both the Bombay stock exchange (BSE) and National stock exchange (NSE). Here are a few examples of penny stocks in India:
|Company Name||Last Price (Rs)||Market Cap (Rs Cr)|
|Andrew Yule & Co||9.88||483.08|
|M T N L||6.95||437.85|
|GVK Power Infra.||2.6||410.59|
|CG Power & Indu.||6.2||388.58|
|SREI Infra. Fin.||4.05||203.75|
|D B Realty||6.6||160.55|
|MSP Steel & Pow.||4||154.17|
|Uttam Value Ste.||0.2||132.16|
Quick Note: In the United States, penny stocks used to be those stocks who trade below one dollar ($1) i.e. the stock worth pennies. However, nowadays, even the stocks trading below five-dollar are considered penny stocks there.
PROS of Penny stocks
Penny stocks have a high potential of rewarding its shareholder. The returns are quite high if you are able to get a good penny stock. Many penny stocks have turned out to be multi-baggers for their investors.
These stocks are able to make explosive moves. There are a number of penny stocks that have given multiple times returns in just a few months. Moreover, due to the low market price of these stocks, investors are able to buy large quantities of penny stocks.
Generally, penny stocks are not known to many as retail investors do not have information about these stocks and the institutional investors do not invest in these companies because of their low market capitalization. Therefore, if you are able to find one such stock before the market does, then it can turn out to be a great wealth creator for you.
CONS of Penny stocks
The cons list of penny stocks is too large compared to its pros. Here are few of common disadvantages of buying penny stocks:
- High Risk: These stocks are quite risky as the percentage of a number of penny stocks outperforming the market are quite less. Many of the penny stocks become bankrupt and go out of the business.
- These stocks have very low liquidity. Therefore there will be troubles on both ends of transactions i.e. buying and selling. While buying these stocks, you might not be able to find a seller. In case you bought the stock, and the stock price starts falling, then you won’t be able to find a buyer to sell the stock.
- There is a large bid-ask spread in these stocks.
- Limited information is available to the public about the company.
- Price manipulations: There have been a number of cases of price manipulations in penny stocks where the insiders try to inflate the share price. Further, one can easily manipulate the penny stocks by buying large quantities of these stocks.
- Sudden delisting and regulatory scrutiny: There are multiple cases where penny stocks have been delisted from the stock exchanges. Further, these stocks are regularly under the scrutiny by SEBI.
- Prone to scams: There are a number of past scams in penny stocks (Ex- pump and dump).
Who should buy penny stocks?
Penny stocks are suitable for those investors who are ready to take high risks in expectations to get high returns. If you have a low-risk appetite, do not invest in these stocks.
Rules for investing in penny stocks
Here are the few guidelines that can help you to invest in penny stocks.
- Look for value, not just the price: Even for penny stocks, you need to look at the value the company is giving. Understand the company’s business, product, services, etc. Investing in penny stock is not buying a lottery ticket.
- Study the company’s fundamentals: Look at the company’s financials, management, debt, growth rate, etc
- Check the liquidity: Buy stocks that have reasonably high trading volumes so that there is ample liquidity.
- Promoter’s share and pledge: Check the promoter’s shareholding patterns and stock pledge if any.
- Technical factors: If you know technical analysis, then also check the penny stock’s technicals. Moreover, if you’re purchasing penny stocks just for quick returns, do not ignore looking into factors like momentum, technical indicators like moving averages, RSI, etc.
- Invest only a small portion of your investment in penny stocks: As these stocks have a high risk, you should only invest a small amount, less than 10% of your total investment amount in penny stocks.
- Monitor continuously: Penny stocks are very volatile. As these stocks are known to make explosive moves, therefore monitor these stocks continuously. If the stocks are performing well, buy more. If they are continuously performing poorly, get rid of it.
- Do not diversify: As you are only investing a small proportion of the amount in these stocks, diversifying will make the net investment even smaller. Select only 2 or 3 penny stocks and invest in them.
- Be disciplined: Do not invest all in if your penny stocks start performing tremendously good. 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 find the reason behind it.
While there are a number of peoples who have created huge wealth by investing in penny stocks, however for many penny stocks are wealth destroyers. If you are going to invest in penny stocks, do your research carefully and do not speculate about the stock. Moreover, there are high risks involved in these stocks. So, be ready for it.
Finally, here’s a short video to summarize what are penny stocks in India and how to research and analyze them.
That’s all for today on penny stocks. I hope this post was useful to you. If you have any doubts/queries, feel free to comment below. I’ll be glad to help. Happy Investing and Trading. Take care!
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Hi, I am Kritesh (Tweet me here), an NSE Certified Equity Fundamental Analyst and an electrical engineer (NIT Warangal) by qualification. I have a passion for stocks and have spent my last 4+ years learning, investing and educating people about stock market investing. And so, I am delighted to share my learnings with you. #HappyInvesting