Stock market investing can be very lucrative, especially if a trader makes wise choices. Trading can now be done online from the convenience of one’s home thanks to technology. Traders can invest in well-established, mid-sized, and/or relatively small businesses because of the market’s diversity. However, some traders have a reputation for investing in the shares of well-known or mid-sized companies. These are appealing mostly because of the company’s reputation, which it has built over years of consistent revenue growth. On the other hand, while investing in small businesses is risky, some investors are nonetheless drawn to it.
What are Penny Stocks?
Penny stock really had no theoretical definition and just minimal price. It trades for as little as Rs. 10 or even single digits. Companies with small market capitalizations typically issue penny stock, which are typically illiquid. Additionally, because penny stock are traded seldom, their values are quite unstable.
Through technical analysis, it is simple to forecast how large-cap companies will trade. However, due to the absence of price history, it is difficult to forecast penny stock swings. Furthermore, information about their operations and foundations is not easily accessible.
When there is news of a business turnaround, the penny stock values increase. As a result, there is more speculation and trade, which drives up the price of penny stock. However, if unfavourable information about their company spreads, penny stock values may plunge.
In an effort to swiftly increase their profits, many individual investors purchase penny stock. Retail investors will lose a lot of money if penny stock values decline rapidly. Both the BSE and the NSE allow penny stock trading.
Penny stocks are susceptible to price manipulation by stock operators. For example, stock operators may intentionally boost the volume of penny stock to drive up their values and trap regular investors.
The operators of the penny stock sell off their shares at a profit after numerous retail investors buy into the stock. As a result, the value of penny stock tumbles and retail investors lose money.
Penny Stocks Features
Penny stock prices might be more volatile than other shares. There is no guarantee that they will provide a favourable return on investment. The value of penny stock might fall unexpectedly. If you wish to invest in penny stocks, remember the old saying “don’t put all your eggs in one basket.”
Penny stock are distinguished by excessive price volatility and lack of formal exchange listing. When it comes to investing in penny stock, the risks are typically substantial.
Trading penny stocks is not for everyone. Because it is risky, you should only invest what you can afford to lose. Even if your study shows that a specific penny stock’s price will climb, there is no assurance that it will.
The following are the features of penny stock:
High-returns:
When compared to other types of securities, these equities have potential to generate much larger returns. Because such shares are issued by small and micro-cap enterprises, they offer enormous growth potential. As a result, penny stock are risky due to their rapid reaction to market swings.
Low-cost:
Penny stock are typically priced at less than Rs. 10 in India. As a result, with a tiny investment, you might buy a large number of stock units from the penny stock list.
Illiquid:
Penny stocks in India are illiquid due to the fact that the companies that issue them are quite unpopular. It becomes difficult to locate individuals willing to acquire these stocks, resulting in minimal assistance during emergencies.
Unexpected Pricing:
Penny stock may not sell for a high enough price. The profit margin might drop or perhaps disappear altogether as a result. Similarly, these equities may command a significantly higher price than you paid, resulting in a sizable profit.
Things To Keep In Mind While Buying Penny Stocks
Here are a few key points concerning penny stocks that every investor should be aware of:
- Penny stocks are ideal for beginning investors
Penny stock are often ideal picks for inexperienced investors who are just starting to start in the stock market. They allow you to explore more freely, allowing you to understand the ins and outs of trading firsthand. The initial investment might be cheap since the price of a penny stock is often maintained low. This also helps to limit your losses.
- High Gains Can Be Obtained From Penny Stocks
Contrary to common belief, not all penny stocks will fail. There are several appealing companies with strong financials and development prospects that are being traded at bargain rates. You may produce high returns and see your original investment increase by properly recognising these companies and investing in them. However, in order to receive high returns, you may need to retain your investment for a longer length of time.
- There Is No Entry Barrier For Penny Stocks
When it comes to penny stock, you don’t need much to get started. Penny stock price movements are largely speculative and do not require or follow rigorous technical analysis. This makes them an excellent alternative if you’re just starting out in the world of stock market investing. To begin trading penny stocks, no certificates or substantial trading skills are necessary. Penny stock have no entrance barriers because all you need is an internet connection and an online trading account.
- The Liquidity Of Penny Stocks Is Often Low
Because penny stock have a small market capitalization, their shares are not commonly traded in the stock market. Because of the limited volume of trade, it could be difficult to discover both prospective buyers and sellers. You may overcome this constraint to some extent by investing in penny stock in the long run. To accumulate or exit the shares, you can also use a staggered buying or selling approach.
Why Should You Invest In Penny Stocks?
Penny stock are best suited for investors with a high-risk tolerance and the anticipation of larger returns. Investors with a low-risk tolerance should avoid these stocks. Penny stock can be a hit-or-miss proposition. On the one hand, these businesses may expand into larger facilities and earn better profits, or they may fail and experience massive losses.
While penny stocks come with their own set of risks, they can be part of an investor’s portfolio. Here are some of the reasons:
Multi Bagger Stocks:
Stocks that give returns that are several times their costs are called multibagger stocks. Like wise some penny stocks have the ability to generate multiples of earnings. As a result, some of these might provide returns that are multiples of the initial investment. Including these stocks in an investor’s portfolio can greatly boost their return possibilities. Some equities may even outperform big and mid-cap companies. It is, nevertheless, critical to conduct thorough research on selected penny stock in order to determine which ones might multiply portfolio earnings.
Inexpensive:
Penny stocks are typically less expensive than other stocks or investments. This enables investors to invest in them without the risk of incurring large losses. A modest portion of a portfolio dedicated to the greatest penny stock allows an investor to devote the remainder to more solid investing alternatives. This also contributes to balancing the total risk factor.
What Are The Risks Associated With Penny Stocks?
Given the scale at which these organisations operate, they are prone to significant risks. The value of these equities is strongly dependent on market conditions. Aside from the standard risks associated with any market-linked security, penny stocks also carry additional risks.
These risks are as follows:
Information is limited: Because penny stock firms are typically small companies, there is a scarcity of information about their financial health, prior performance, growth potential, and so on. Individuals may wind up investing in them unknowingly. Before buying, do extensive research on the list of penny stock in India.
Scams: Penny stock frauds are widespread in the history of international finance. “Pump and Dump” is one such common strategy. Companies and fraudsters buy a large number of penny stocks, causing value inflation and enticing other investors to follow the hype.
However, after a sufficient number of investors have bought in such equities, such companies and fraudsters dump their shares. This causes an instant decrease in value, followed by losses on the part of sensible investors when they try to sell it.
When looking through the list of penny stocks in India, be sure to do extensive research on the company. Gather information about their financial health, stability, growth forecasts, and any operational track record.
Companies with integrity and potential will provide customers with adequate information about the aforementioned elements to make educated selections.
What Are The Alternative Options For Penny Stocks In India?
Individuals might also choose to invest in alternative investment options that are more suited to their goals and risk tolerance. Mutual funds are one such alternative that is gaining traction in the industry. MFs are investment pools in which several people participate in a single fund, which is subsequently used to acquire securities.
The following are some mutual fund investing options:
-
Large and mid-cap equity funds:
This type of MF is used to buy equity shares and equities from large and mid-cap companies. When compared to penny stocks, these funds offer a moderate return capability and a reduced risk.
-
Debt Funding:
These funds, which have a lower risk factor, are used to acquire fixed-income assets.
-
Hybrid Investment Funds:
These funds are used to invest in a combination of market-linked and fixed-income assets. The risk and return factor varies depending on the constitution. Hybrid Funds are an excellent way to diversify your investment portfolio and balance its reward and risk components.
Apart from penny stocks, these funds invest in a wide range of assets, including large-cap stocks, mid-cap stocks, small-cap stocks, treasury bills, government bonds, debentures, and so on.
FAQs
-
What are Penny Stocks?
Penny stocks are the stocks that are traded at a low price and low volume. The minimum price of penny stocks in India is Rs. 0.01. Penny stocks canbe traded on the NSE and the BSE India.
-
If you want to make a lot of money, should you buy penny stocks?
If you are an active, knowledgeable investor in the market, you must invest in penny stocks. Additionally, only put money into them that you can afford to lose.
-
For how long should you hold onto penny stocks?
You might be tempted to hold onto penny stocks as a long-term investment. If you do make a quick 15%–20% return, you can adopt a strategy that involves selling penny stocks.
-
When does a penny stock stop being a penny stock?
The company may have reached a particular degree of growth if penny stock prices increase and remain steady over time. This may indicate that the stock is no longer a penny stock and that its price has moved up to small- or mid-cap levels.
-
How can I begin buying stocks in India?
To begin investing in stocks in India, you must first clearly define your objectives and understand why you want to do so. You can be prepared to start investing in stocks by opening a demat and trading account and creating a budget.
-
Why are penny stocks so cheap?
Because penny stock can be purchased at low costs, many individuals invest in them. The market capitalization of penny stocks, which is defined by the stock price and the number of outstanding shares, is, nevertheless, minimal. Since penny stock are rare, you can purchase them for a minimal cost.
-
In India, how can I pick penny stocks?
To select penny stocks, it is necessary to first comprehend the market and then perform basic research on various stock categories. Understanding stock prices and values allow one to discover penny stocks that should be researched further to prevent sheer speculation.
Interested in how we think about the markets?
Read more: Zen And The Art Of Investing
Check out all our “Investor Education Originals” videos on Youtube and get smart about investing.
Start investing through a platform that brings goal planning and investing to your fingertips. Visit kuvera.in to discover Direct Plans and Fixed Deposits and start investing today.
#MutualFundSahiHai #KuveraSabseSahiHai #PersonalFinance #InvestorEducation;
