As far as the doubling of money is concerned, penny stocks come second to none. This is because such stocks present a wide range of opportunities for new investors as well as experienced both.
And when it comes to investing in money, investors often seek mid-cap and large-cap stocks, however, the majority of them neglect penny stocks.
What are Penny Stocks?
Penny stocks are small stocks and come under the small-cap category. If you are a regular trader or investor, you must have heard the term penny stocks. Well, these are small-cap stocks that attract minimal pricing. According to the Indian stock market trading scenario, stocks whose market capitalization is less than Rs 10, comes under penny stocks.
Due to low market capitalization, these stocks seem alluring to many investors as these shares are available at low price and investors would purchase more shares with low investment amounts.
Another important reason behind the strong hype of penny stocks is, they have a low frequency of trading, their prices are subjected to sudden and high levels of volatility.
Let’s understand penny stocks with a suitable example:
A company XYZ Limited has a share price of Rs 500 and a penny stock to be Rs 5. If an investor has a capital of Rs 10,000, they would be able to buy only 20 shares of the established company. With the same capital amount, they can purchase the penny stocks of 2000 shares.
Things You Should Know About Penny Stocks
Penny Stocks are Apt for Newbies
If you are new to the stock market, then penny stocks can act as a good choice for you. This is because penny stocks enable you to learn the ins and outs of trading first hand, i.e stock market learning. Since the price of penny stocks are low, investors purchase a high volume of penny stocks with a limited capital amount. This also helps investors to minimize their losses.
Penny Stocks Possess Low Liquidity
Penny stocks are not traded in the share market frequently. Due to a low volume of trades, investors may find it difficult to find both buyers and sellers. However, they can overcome this limitation to a certain extent by holding the shares of penny stocks for the long term.
Penny Stocks Do not Have an Entry Barrier
Penny stocks are easy to trade and therefore many investors especially newbies find it easy to trade in the stock market. Price movement of penny stocks are speculative and require very less methodical technical analysis. This makes investors the perfect choice for you if you are just making an entry into the world of the stock market.
Penny Stocks Can Generate High Returns
There are multiple companies with good financials and growth potential that are being traded for pennies. By identifying these companies, investors can generate good returns and watch their investments grow.
Why Should You Invest in Penny Stocks?
Penny stocks can be considered as a miss or hit opportunity. Companies issuing them might grow into large organizations and give a higher yield than average returns.
Some of these stocks can turn out to be multi-bagger stocks. This means some penny stocks can generate returns of more than 100 per cent against their investment amount. And, if some penny stocks give a return ten times its investment value then it is considered a ten-bagger.
Hence, if investors could include these stocks in their portfolio, these stocks could exponentially increase their returns and have a large chance to outperform mid-cap and large-cap funds.
To find out the best penny stocks which have the potential to be multi-baggers, investors need to go through thorough stock market research.
Let’s understand it with an example:
Suppose Mr X invested Rs 10,000 in penny stocks of ABC Pvt company. Each unit cost is Rs 10. The company did well in the market as its performance rose by a huge margin and its stock value reached up to Rs 100. If Mr.X sold its 1000 shares at Rs 1,00,000. I.e (10,000/10=1000, Rs 1000*100=Rs 1,00,000) hence this stock gains ten times a return. Such stocks are considered as a ten-bagger stock.
As we said above, these stocks are cheaper than other stocks and hence you can easily do share trading and invest in them without taking any risk of losing huge amounts of your investment finances.
Therefore, if they fill a small portion of penny stocks into their portfolio, chances are investors creating room for better investment options while minimizing the risk associated with it.
What are the risks associated with penny stocks?
As these stocks heavily depend on the market condition for the growth in their stock’s intrinsic value, they are associated with high risk.
Apart from the fundamental risks linked with the stock market, these stocks also come with other types of risks which can’t be neglected.
The companies that mostly issue penny stocks are startups. These companies freshly come into the stock market for fundraising and needless to say, there are a lot of insecurities associated with these stocks such as lack of information on the past performance, financial soundness, growth prospects of such stocks.
Therefore, it is suggested to do complete research before investing in penny stocks. Also, there are several stock market courses available on the internet. You can take a wide range of knowledge from there.
If you look at the financial history, you might have heard that penny stock scams are very common in the international stock market. One such popular method is pump and dump. Under the pump and dump method, investors with an intention of scamming, purchase a huge amount of penny stocks. Such hype attracts new investors to purchase these stocks.
Once the company realizes that they have enough buyers who have invested in their stocks, the speculator immediately reduces the value of these stocks resulting in the losses of new investors.
What are alternative options to Penny Stocks in India?
Apart from investing in penny stocks, investors nowadays seek out new investment options that are suited to their portfolio and risk appetite both.
Mutual funds are one of the best investment options investors are gaining interest in. Mutual funds are a professionally managed investment scheme that pools money from numerous investors and invests this money in securities such as stocks, bonds, and debts.
The Bottom Line
While penny stocks seem an attractive investment option for many investors because of their low pricing, they do carry risks like other equity shares. The price movement of such stocks heavily depends on the market condition which makes penny stocks highly risky. However, these risks can be mitigated if you do complete research about these stocks before investing.
Well, if you need the right investment advice regarding any stocks and mutual funds, you may consider Swastika as the best stock trading platform for beginners and experienced both.
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