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Penny Stocks

01 Jan, 1970 05:30

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What are Penny Stocks?

Penny stocks are low-priced, speculative equities of small businesses that trade in low volumes. These stocks are low cost, and it is nearly risk-free to experiment with penny stock investing. Penny stocks are quite popular with small investors because of their potential for huge gains. The gains may be in the range of 300% to 500% or even higher. Even if you have a small investment of ₹100, you can still gain up to ₹500 profit.

List of Penny Stocks

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Multibagger Penny Stocks

Multibagger penny stocks are identical to penny stocks; the only difference is that their price rises every once in a while from the time you invest. If an investor invests in a stock priced at ₹10 and the price rises to ₹20, the stock is known as a two-bagger. Similarly, if the price exceeds ₹30, it is referred to as a three-bagger, and so on. When the price reaches ₹20, it is a 100% profit, and when it reaches ₹30, it is a 200% profit and continues to rise. This is known as multibagger penny stocks. There is no standard definition for multibagger stocks, however a stock is said to be a multibagger when it can provide 100% or more returns in a short period, i.e. when it becomes 2X or 3X its original value.

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Debt Free Penny Stocks

Debt-free penny stocks are penny stocks that have no debt. When it comes to portfolio diversification in a volatile market, debt-free penny stocks are crucial. They have the potential to be profitable in the long run.

Features of penny stocks

Some characteristics of penny stocks include little liquidity, limited historical information, the possibility to become a multi-bagger stock, and relatively low values. Let's understand these:

1. Low liquidity: Penny stocks are typically connected with small businesses and move infrequently, indicating a lack of liquidity or available buyers in the market. As a result, investors may find it difficult to sell a penny stock during an emergency because buyers are not always available.

2. Limited historical information: Many of the companies classified as penny stocks may be newly formed, and some might be on the verge of bankruptcy. These businesses will typically have a poor track record or no track record at all. As you might expect, a lack of historical data makes determining a stock's potential challenging.

3. High Return Potential: Penny stocks typically have a higher level of volatility, resulting in a bigger potential for reward and, consequently, a higher level of inherent risk.

4. Low cost: Penny stocks due to their lower price have the potential for a substantial upside in share appreciation.

Benefits of investing in penny stocks

The penny stocks are quite volatile but have the potential to provide exceptional returns. They have the potential to produce quick growth in a short period of time, and as a result, they have become a popular choice among investors. Major gains can be made with a small amount of money invested. 

1. Tomorrow's Gainers: Many good businesses trade for pennies. They may have proven management and teams, strong financial positions and rising ratios, a growing revenue, and innovative products or services poised to dominate an industry. 

2. It is exciting to hunt for a perfect Penny stock: We all know the adrenaline that comes with significant profits (and losses) in an investment. Hunting, trading and investing in penny stock are all exciting and thrilling.

3. A small sum can turn into something much bigger: The majority of penny stock investors begin trading with small amounts. With ₹10,000 to trade, an individual may only be able to purchase three or four shares of a blue-chip business. The same amount of money could buy them thousands of penny stock shares.

4. Gains at a Rapid Pace: Not all penny stocks see rapid price movement. Those who do, however, tend to produce large price swings in days rather than years.

Risks of investing in penny stocks

Holders find it difficult to cash out due to a lack of liquidity. Penny stocks are often thinly traded. Artificially inflating share prices may result in false statements about the company's status, often known as the "pump and dump" strategy, which is a type of fraud in microcap stocks.

How to find penny stocks?

Before investing in a penny stock, investors should conduct extensive due diligence. Research the company well. Try paper trading - A paper trade is a technique of simulating trading for investors to practise buying and selling stocks without using actual money. Monitor your investment regularly. You should select stocks from the over-the-counter (OTC) markets. Avoid the Pink Sheets stocks meaning the stocks which are prone to manipulation. Avoid the pump and dump stocks. Avoid penny stocks with low liquidity. Know when to sell your penny stock so you can make quick money. Trade penny stocks only with money you can afford to lose.

Investment/Trading in securities market is subject to market risk, past performance is not a guarantee of future performance. The risk of loss in trading and investment in securities markets including Equities and Derivatives can be substantial.

FAQs

Penny stocks in India are the stocks that are traded at a low price and volume. The minimum price of penny stocks in India is ₹0.01. Penny stocks in India are traded on the NSE and the BSE. Invest Now

The price of penny stock can be more volatile than other shares. There is no assurance that they will give good returns on investment. The value of penny stocks may go down without any warning. If you want to invest in penny stocks, then follow the rule of "Don't put all eggs in one basket".

Penny stocks are characterised by high volatility in prices and do not have any formal listing on the exchange. Penny stocks usually carry high risks when it comes to investment, especially when trading them online.

Penny stocks are considered shares of low value traded on over-the-counter bulletin boards. Unlike regular trading, investors do not buy these securities from the company itself but brokers or dealers. These dealers make a profit by marking up the price of the stock they are selling to you. Thus, they are also known as 'marketers'.

Penny stocks are generally quoted with two different prices – bid price and ask price. The bid price is the price at which a dealer is willing to buy the security from you, while the asking price is when a dealer will sell you that security. The difference between these prices is called the spread, and it varies with different penny stocks.

The spread indicates how expensive or cheap a penny stock is being traded. The wider the spread, the more expensive it is for investors to buy them, which might translate into higher risks for investors who hope to gain from price appreciation of these securities.

Because of the risk involved with penny stocks, some investors don't think it's worth buying shares in them. Others argue they're fine if you know what you're doing and have the time to monitor your investments carefully.

Yes Bank, Suzlon Energy, South India Bank, Reliance Power, Vodafone idea, and Bank of Maharashtra are among the top penny stocks.

A demat account is required in order to trade penny stocks. Using an online trading platform, an investor can easily start trading penny stocks. Click here to open a demat account with 5paisa.

Penny stocks are traded on BSE and NSE.

When compared to other investments like mutual funds or equity shares, penny stocks which offer investors above-average returns on their money tend to give the highest returns.

Penny stocks that have a low pledge, high sales, and profit growth, and P/E less than industry P/E are generally considered to be the safest penny stocks to buy. 

Gains from penny stocks could reach as high as 500% or even more. You can still make a profit of up to ₹500 even with a modest investment of ₹100.

This frequently occurs in penny stocks because they lack liquidity. Similarly to this, there may be many bids but no one is willing to sell these shares when there is strong buying pressure and demand for a particular stock.

Low-priced stocks are highly volatile. This fact worries a lot of investors. Because of this volatility, it is possible to lose every penny you have put into penny stocks. Therefore if you have knowledge of volatility then you can invest in penny stocks.

Buying penny stocks raises a number of issues. First, you could lose money if the company fails and its stockholders lose their investment. Another risk is that the stock depreciates over time while other investments grow in value, making it unprofitable (possibly outperforming them).

You might be tempted to make long-term investments in penny stocks. However, if you manage to generate a 15% to 20% return in a brief period, you can adopt a strategy where you sell penny stocks.

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