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What are Penny Stocks?

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  5. What are Penny Stocks?

When making an investment decision, it is the little moves that count. As an intelligent investor, you might want to look for smaller investments to start off with. This is where the concept of a ‘penny for your stocks’ can come into play.

Penny stocks offer unique features, advantages, and disadvantages. However, it requires extensive research and understanding to ensure favorable investments and returns.  

If you are planning to invest in penny stocks, you should know what penny stocks are and how you can incorporate them into your portfolio. 

What are Penny Stocks?

If you are wondering what penny stocks are, they are stocks that are priced typically below ₹10 or 20 per share in the Indian stock market. 

Penny stocks are commonly the shares of small companies trading at a very low volume and price. They are highly volatile, meaning market fluctuations significantly impact their performance.

Penny stocks offer investors low liquidity and very high volatility. They pose an equal scope of significant gains as well as losses. To understand penny stocks in India better, let us look at their key features. 

3 Key Features of Penny Stocks

Limited Liquidity

As mentioned above, penny stocks have a small market capitalization, which means the number of shares available for trade is fewer compared to large companies. Moreover, the number of investors/traders interested in purchasing these highly volatile penny stocks is less. 

This makes the buying and selling of these stocks a hassle, as the gap between the highest buying price and the lowest selling price is very broad.

Dynamic Returns

Other than knowing what penny stocks are, you should also know that returns on penny stocks are unpredictable. This means that penny stocks promise an equal probability of both high risk and high rewards or high losses. 

They are incredibly volatile in nature, impacting price movements significantly. This is because, since penny stocks trade at very low prices, even a small price exchange can show significant gain or loss.  So, you can either witness high returns or significant losses based on market volatility. 

Lack of Transparency

Large corporations are subject to a long list of regulations and reporting standards, but the same does not apply to small companies offering penny stocks. 

Due to this, the level of transparency is very low with penny stocks, making it difficult for you to gather relevant information regarding the company’s financial performance.

Top Benefits of Investing in Good Penny Stocks

  • Low Barriers to Entry -As you are aware, penny stocks are available at very low prices per share. Due to the low pricing, it becomes an easy investment option for people with limited capital resources. Therefore, people with limited funds can easily start their investment journey with penny stocks. 
  • Scope of High Returns – Good penny stocks with strong fundamentals canhave great potential to attract high returns, even in the short run. 

Thus, along with the advantage of low prices, you increase your chances of earning significant returns with these stocks. 

Moreover, since companies at early stages of development commonly offer penny stocks, their chances of being a high-growth stock in the future are very high.

  • More Stocks for Less Investment –  Now that you know what penny stocks are, you should also acknowledge their benefit of securing more quantity in less investment.  

It means that with the same investment budget, you can buy a higher quantity of penny stocks compared to only a few blue chip stocks or other high-reputation shares. Simply put, with a budget of ₹10,000, you can buy 1000 penny stocks as opposed to 2-3 blue chip stocks. 

Potential Drawbacks of Penny Stocks

  • Limited Information – Most companies that offer penny stocks are new or at the start-up stage. Due to this, there is limited information regarding their financials and other market updates, making it difficult to assess them correctly.
  • High Scope of Manipulation – Another potential disadvantage of penny stock investments is that they pose a high risk of manipulation. Common schemes like matched orders, pump-and-dump, wash trading, etc., can deceive you into believing that the stocks are highly beneficial. However, in reality, they leave you with high losses.
  • High Volatility—Penny stocks face intense market fluctuations, which directly impact their prices. Depending on market updates and company growth, they can go from very low to extremely high in just a few days. Thus, evaluating your potential returns based on prices alone is not feasible.
  • IAdd Illiquid -as a drawback too Penny stocks are illiquid, i.e. there are not enough buyers and sellers at any given time. This makes it hard to buy or sell shares without and also contributes to the high volatility. As an investor, you will not be able to sell the shares quickly or may have to sell them at a lower price.

Tips to Choose a Good Indian Penny Stock

  1. While choosing an Indian penny stock, always conduct proper research into the listed company’s finances and growth potential.
  2. Focus on a company’s fundamentals before investing. This includes revenue growth trends, debt-to-equity ratios, and profitability. Also, not all popular penny stocks may be worth your investment.
  3. When choosing how many penny stocks to buy, do not jump the gun. Instead, pace it up by limiting the initial penny stock investments. Moreover, for better portfolio management, explore different sectors for penny stocks. 
  4. Assess the trading volume of a particular penny stock to choose the one with a decent volume. This decreases the potential barriers to entry and exit, providing you with ample flexibility to buy and sell as required.
  5. Do not expect instant returns. The penny stocks are highly volatile but offer great long-term potential. You need to be patient and keep a constant check on the company updates.

Final Thoughts

Now that you are aware of what penny stocks are, you can make the correct judgment about whether they fit your risk tolerance or not. 

Penny stocks are investment options for investors with a medium to high-risk appetite, as these stocks are highly volatile. The choice between good penny stocks and popular penny stocks is based on your research and financial capacity. 

Before investing in any Indian penny stock, evaluate company fundamentals and focus on portfolio diversification to increase returns in the long run. 

For added assistance, seek guidance from a reputed SEBI-registered investment advisory firm. The experts can help monitor your portfolio and offer daily alerts and regular guidance to keep you informed.  

  1. What are penny stocks' investment exit strategies?

    Some common exit strategies that you can explore include – 
    Setting a personal investment timeframe. 
    Keeping a constant check on the market updates.
    Limit your losses by setting stop-loss orders to implement an automatic sale of penny stocks as soon as it hits a pre-decided level of prices. 

  2. What are multibagger stocks?

    Multibagger stocks, in regard to penny stocks, are stocks that attract a significantly high return for a small investment. Simply put, these penny stocks cost very little and offer multifold returns, like double or triple the invested amount.

  3. Can I invest in penny stocks as a beginner?

    The sales for penny stocks start at a very low price of ₹10, making them a favorable investment option for beginners. You can start with as low as ₹10 and increase the investment amount as per capacity to begin your investment journey. 

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I’m Archana R. Chettiar, an experienced content creator with
an affinity for writing on personal finance and other financial content. I
love to write on equity investing, retirement, managing money, and more.

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