A primer on penny stocks

Padmaja Choudhury   /   April 8, 2022

Penny stocks have a stock price of less than Rs.25. Should you invest?

This article will talk about stocks that are not widely discussed, i.e., penny stocks. Penny stocks have a very low stock price, and these companies are generally not well established.

In most cases, investing in penny stocks is just like gambling or speculation. Penny stocks may have a high potential to grow your money if you are lucky and select the stock after extensive research.

Before jumping to putting your money into penny stocks, let’s explore the territory for these low price trading penny stocks.

What are Penny Stocks?

Penny stock has no exact definition, but the stocks trading at lower than the Rs. 10 are usually considered penny stocks. Also, sometimes stocks with a price of less than Rs. 25 are also considered penny stocks. Most penny stocks are associated with small-sized companies and do not have a strong balance sheet.

At the same time, few penny stocks ‌have the potential to give attractive returns, as they have solid fundamentals. Also, most penny stocks are not liquid, and investors may face liquidity issues during exit.

Penny stocks are highly speculative because of low-volume trade and small company size.

Things to Know about Penny Stocks
  1. Lack of information available to the public: Adding potential investment-worthy stocks to the watch list requires researched & informed decisions. Penny Stocks don’t have information available to people. Also, the ‌information available may not be correct.
  2. Lack of Compliances: In India, penny stock companies often don’t even comply with the rules & regulations of the Stock Exchange. They are not precisely transparent in their reporting and statements.
  3. Fraud: The stock market has several stories about frauds through penny stocks. Usually, large capital investors put money on penny stocks to influence retail investors to buy penny stocks. And as stocks reach a certain level, large investors pull out their money, which may cause enormous losses to retail investors.
  4. High Potential: It is possible that the company will grow with time. If the company is doing well and the fundamentals are reasonable, it has a good chance of becoming a mid-cap company soon. This could make your money grow significantly.
Should You Invest in Penny stocks?

There isn’t a clear ‘yes or no’ to such a query because some penny stocks ‌have the potential to grow your wealth. A significant number of penny stocks, on the other hand, are questionable and extremely dangerous investments to make. Before investing in penny stocks, knowing the fundamentals, studying the company’s reports, and technical analysis are essential.

Stock price is not enough.

The standard method of considering a likely company to invest in is by looking at market capital while diversifying the portfolio. The stock price depends on the demand and the number of shares available to the public.

For example, if a company’s stock price is Rs.30 and shares are 1,00,000, the market capital sums to Rs.30 lakhs. At the same time, if a company’s stock is trading at Rs.300 with 10000 public shares, it will also have a market capitalisation of Rs. 30 lakhs.

The argument is that, while a stock’s price point isn’t always necessary, its market capitalisation and fundamentals are essential.

Conclusion

While there are plenty of opportunities to make money with penny stocks, we’d advise against buying into most penny stocks. Most of them aren’t worth the time or effort. Who knows? Some of those stocks could end up being lucrative investments. But what if they’re just a scam in disguise? So, should you invest in penny stocks? There’s no one-size-fits-all answer. But we can say this: as long as you do your research and are aware of the risks involved, you can probably still find a few penny stocks worth putting your money into.

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