What are penny stocks and how can you gain from them

Penny Stocks
  • On 04 Mar 2022

What are penny stocks and how can you gain from them

Penny Stocks

Penny Stocks Are Those That Trade At A Very Low Price, Have Very Low Market Capitalisation, Are Mostly Illiquid, And Are Usually Listed On A Smaller Exchange. In The Indian Stock Market Penny Stocks Are Also Less Than Rs. 10 These Stocks Are Very Speculative In Nature And Are Considered Highly Risky Because Of Lack Of Liquidity. Penny Stocks Are Highly Risky, But Some Of They Also Have The Potential Of Turning A Small Investment Into A Fortune. 

Apart From Low Prices, There Are Certain Distinct Factors That Set Penny Stocks Apart From The Other Stocks In The Market.

1) Low Market Capitalisation

2) Illiquidity

3) Unpredictability

4) High Risk

1) Low Market Capitalisation

Penny Stocks Have Market Capitalisation Of LessThen 50-100 Crores.

2) Illiquidity

Due To Many Reasons, Penny Stock Companies Tend To Be Unpopular. Therefore, There Are Generally Not A  Lot Of Investors Looking To Purchase These Stocks, Resulting In Low Liquidity. When the Stock Have Not Much Liquidity, There Are Two Problems: Firstly, It Is Likely That You Will Not Be Able to Sell the Share, Which Is Purchased. If Shares Of Low Liquidity Levels, It Can Be Difficult To Find A Buyer For It, You May Be Required To Reduce The Price, As Long As It Does Not Seem Attractive To Another Buyer. Second Is The Low Level Of Liquidity Allows Some Traders To Control The Prices Of Stocks, Which Is Done In A Different Way.

3) Unpredictability

While All Stocks Come With Their Own Share Of Unpredictability, It Is Even Harder To Predict The Movement Of Penny Stocks.

4) High Risk

Penny Stocks Are Much More Risky Than Regular Stocks

Compared To Other Types Of Stocks, Penny Stocks Have A More Intense Reaction To The Market Movements.

Unfortunately, Some Investors Believe That The Search For The Next "Big Thing" Means To Sift Penny Stocks With The Hope Of Finding The Next Microsoft Or Wal-Mart. It's Probably Not The Best Strategy.

We Have To Research A Lot Before Investing In This Kind Of Stocks

Below Are Some Problems Faced To Take Decision On Buying Of Penny Stocks :

1) The Lack Of Information Available To The Public

2) Lack Of History

3) Low-Quality Stocks

4) Thinly Traded

5) Volatility

1). The Lack of Information Available to the Public :

The Key To A Successful Investment Strategy Is To Get Enough Relevant Information To Make Informed Decisions. Information Related To Small-Cap Company Is Very Hard To Find

2) Lack of History :

These Companies Usually Have A Little Story Or None At All. As You Can Imagine, The Lack Of History Of The Company Only Increases The Difficulty In Choosing The Right Stocks.

3) Low-Quality Stocks :

 Most Penny Stocks Come From Low-Quality Companies. In Some Cases, This Is Because Their Finances and Balance Sheet Are A Train Wreck, And Their Operations Produce Large Losses. The Product Or Service They Offer Could Be In A Dying Industry   Or It Could Be Flooded With Too Many Competitors.

4) Thinly Traded :

Unlike Larger Companies That May Trade Tens Of Millions Of Shares Each Day, Some Penny Stocks Are Very Thinly Traded. Many See Only A Couple A thousand Shares Exchanged Daily, While Others May See Even Less Trading Volume.

5) Volatility :

Rapid And Hefty Price Moves Are Great When They Go In Your Favor, But There Are Two Sides To The Volatility Coin. When Prices Fall, So Does Your Investment

Everything Has Two Things Prons and Cons After Seeing Some Of The Cons Of Penny Stock Let Us See Some Of The Advantages Of Penny Stocks

1) Low Share Prices

2) High Gains

1) Low Share Prices

The Best Feature Of Penny Stocks Is Their Low Price. You Don’t Need To Invest A Lot Of Money. This Becomes Beneficial For Investors On A Budget. You Can Have More Share Of Company With Less Amount Of Money.

2)High Gains

Penny Stocks Offer The Potential For High Gains. The Companies That Provide Them Are Still In the Growth Phase. This Means That The Value Of The Stocks Can Rise Higher Than The High-Priced Stocks Of Large And Well-Established Corporations. Also, Even If The Prices Of The Stocks Increase Marginally, The Profits Would Be Huge.

For Example, If You Have 10,000 Shares Of Rs. 5 Each, You Will Have A Total Of Rs. 50,000 If The Price Increases To Rs. 8 In A Day You Will Get 10,000*3 =30,000 Profit In A Single Day

But, The Thing To Remember Here Is That You Will Most Likely Lose Money Rather Than Gaining Because Of The Volatile Nature Of These Stocks.

Things to Know Before Investing in Any Penny Stocks

1) Research The Company In Details

2) Invest In Limited Stocks

3) Invest Short Term Only

4) Don’t Follow The Crowd

5) Big Winners Of Tomorrow

1) Research The Company in Details:

Penny Stock Companies Are Generally Small. They Are Not Quite Popular Or Well Known Even Though They Are Listed On The Stock Exchange. Before Investing In These Stocks, Look Into The Company And Its Products And Understand What You Might Be Investing In. You Don’t Want To End Up With Shares Of A Company Nearing Bankruptcy Or Had Weak Fundamentals. Look At The Fine Print Before Putting Up Your Hard-Earned Money.

2) Invest In Limited Stocks:

Though The Low Price Of These Stocks May Seem Like An Attractive Option, Don’t Be Lured Into Buying More. Penny Stocks Have Large Fluctuations. Investing In Only 2-3 Stocks Is Wise Because It Helps In Keeping Track Of Them

3) Invest Short Term Only:

Investing In Penny Stocks Should Be A Short-term Investment Strategy Only. These Stocks Have No Predictability. So You Can Gain Money Today And Lose It The Very Next Day. A Wise Option Is To Exit While You Gain Money, Making Penny Stocks Suitable for Short-Terms Only.

4) Don’t Follow the Crowd:

There Are Always Rumours About Penny Stocks, Which Usually Affect Their Prices. Rumours Are Spread About the Stocks and Traders Buy the Stocks in Bulk to Show a High Demand. Since There Is Not a Lot of Information Available to the Public About the Penny Stocks, They Look At The Rising Demand And Invest Their Money. Once The Stock Has Reached A Decent Value, The Traders Sell It Off. This Affects The Share Price, Which Then Drops Drastically And Investors Lose All Their Money. The Key Is To Keep A Low Profile Rather Than Invest Hastily.

5) Big Winners Of Tomorrow:

There Are Many Good Companies Trading For Pennies. They May Have Proven Leaders And Teams, Solid Financial Positions, Ratios On The Up, A Growing Market Share, And Creative Products Or Services That Are Set To Take Over An Industry.

 

 

 

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