What are Penny Stocks? Should You Invest!

Penny Stocks

For many novice investors, the primary logical forestall is Penny Stocks. As the name suggests, penny stocks are securities that trade with a low proportion price, frequently less than Rs. 10.

The extremely low price permits an investor to maintain lots of stocks for a particularly small quantity of invested capital. With that scale, the benefit of only a few paise consistent with proportion can translate into large percent returns (the opposite is likewise true, of course). 

But here is a truthful warning: Such shares are commonly taken into consideration to be a surprisingly speculative and excessive danger for numerous reasons.

Their loss of liquidity, big bid-ask spreads (how an awful lot the asking price exceeds the bid price for an asset), small marketplace capitalization and constrained following and disclosure.

What are Penny Stocks?

Penny Stocks are a shape of marketplace traded security that pulls minimum pricing. These securities are mainly presented through businesses with decreasing marketplace capitalization rates.

Therefore, those also are known as nano-cap shares, micro-cap shares, and small-cap shares, relying on the company’s marketplace capitalization.

A company’s marketplace capitalization price is decided primarily based totally on the made of price of its stocks or shares and the number of tremendous stocks i.e. price of stocks * quantity of tremendous shares.

Based on this factor, businesses are listed in acknowledged stock exchanges inclusive of the National Stock Exchange and Bombay Stock Exchange. Penny stocks lists are regularly located withinside the decrease sections of such stock exchanges or lesser-acknowledged stock exchanges.

The following desk demonstrates the type of businesses primarily based totally on their marketplace capitalization rates –

 

Large-cap corporations Large-cap corporations Small-cap corporations
Rs. 20,000 Crore or above Rs. 5,000 Crore – 20,000 Crore  Below Rs. 5,000 Crore

 

 

 

Penny shares in India are, therefore, launched with the aid of using corporations with marketplace capitalization lower than Rs. 5,000 crore.

Characters of Penny Stocks

High-Returns

These shares offer a great deal better returns as compared to different types of securities. As such stocks are issued with the aid of using small and micro-cap businesses, they’ve significant ability for growth. Consequently, penny shares are risky, given their depth of reaction to marketplace fluctuations. 

Illiquid

Penny stocks in India are illiquid, given the truth that the businesses issuing them are surprisingly unpopular. It turns tough to locate those who are inclined to buy those shares, hence imparting little useful resources in the course of emergencies.

Also Read; What is Liquidity Ratio? How to Analyze a Business Using It

Low-Price

In India, penny stocks are commonly priced lower than Rs. 10. Therefore, you may buy a large number of shares from penny listings with a small-scale investment. 

Unpredictable Pricing

Penny stocks may not appeal to okay pricing in the course of the sale. It may bring about a decrease or non-existent income margin. Similarly, those shares can also appeal to a price drastically better than your cost; therefore, ensuing in a widespread income.

Should You Invest in Penny Stocks?

Penny stocks may be taken into consideration as a successor to leave out security. Companies issuing them may develop right into a huge agency and yield better than common returns or tanks of their preliminary years, incurring massive losses. 

Despite those insinuations, penny shares ought to be blanketed to your portfolio. Here are the subsequent motives as to why –  

Multi Bagger

Some of those shares can conform to multi-baggers. It’s a stock that yields in multiples of the funding amount. If particular safety reaps double its investment amount, it will be known as a double-bagger, and if it returns ten instances of its investment, it’s taken into consideration of ten-bagger.

Including them in your portfolio could exponentially boom your go-back possibilities and may outperform the big and mid-cap funds. However, it requires thorough behavior studies into the penny shares listing to gauge which shares can be multi-baggers.

Example

Mr. A invested Rs. 5000 in penny shares of G Ltd., an IT start-up. Each unit prices Rs. 5 i.e. total of 1000 shares. The corporation did properly on the marketplace and their penny stocks price stood at Rs. 50 at the end of the finanial year.

Mr. A then sold his one thousand stocks at Rs. 50,000, as a result, gaining ten instances of his investment. This stock is taken into consideration as a ten-bagger. 

Inexpensive

Investing in those shares is relatively smaller. Hence, you could spend money on them without dropping any sizable part of your portfolio.

Allotting a small part of your portfolio to buy the exceptional penny shares in India could nevertheless permit you the leeway to spend money on other, extra steady investment alternatives at the same time drastically lowering the hazard issue associated.

Risks Associated with Penny Stocks

Given the dimensions at which the corporations presenting such shares operate, they may be at risk of massive dangers. These shares closely depend on availability in the marketplace situations for the increase of their price. 

Apart from the primary perils which include any marketable securities, there are different styles of dangers related to penny shares. These are –

  • Limited statistics: Given the truth that corporations issuing penny shares are start-ups, there exists a dearth of statistics on their monetary soundness, beyond performance, increase possibilities, etc. Individuals would possibly grow to be investing in them half-wittingly. Therefore, behavior through studies into the listing of penny shares in India earlier than investing.
  • Scams: Penny stocks scams are common in global financial history. One such famous technique is “Pump and Dump”. Companies and scammers buy a large number of penny shares ensuing in price inflation which draws different buyers to comply with the hype.

However, as soon as sufficient buyers start investing in such shares, such corporations and scammers unload their shares. This outcome is a direct decrease of price accompanied with the aid of using losses at the scrupulous buyers’ cease as they are attempting to promote it.

When you’re surfing through the listing of penny shares in India, make sure to conduct thorough studies at the respective corporations. Gather statistics on their financial soundness, stability, increase possibilities, and any tune report on their operations.

Companies with integrity and capacity will provide the investors sufficient expertise in the cited elements to make knowledgeable decisions.

Alternative Options to Penny Stocks in India

Individuals also can determine to put money into different funding alternatives which can be higher proper to their goals and threat appetite.

Mutual Funds are one such alternative that is an increasing number of gaining reputation within the marketplace. MFs are funding swimming pools that contain more than one person investing in an unmarried fund that is then used to buy securities.

A few Mutual Funds funding alternatives are indexed below –

  • Large and mid-cap fairness price range: This sort of MFs is hired to buy fair stocks and shares from large-cap and mid-cap enterprises. These price ranges have mild go back capability and entail decreased threat as compared to penny shares.
  • Debt Funds: These funds are used to buy constant profits securities and include a decrease threat component. However, the go-back ability on such a price range is restricted to 12%.
  • Hybrid Funds: These Mutual funds are hired to buy a combination of marketplace-connected and fixed profits securities. Depending on the constitution, the threat and go back component varies. Hybrid Funds are an extraordinary choice to diversify your funding portfolio and stability, the praise and perilous factors of it.

These price ranges incorporate a large extent of securities to be had withinside the marketplace consisting of large-cap shares, mid-cap shares, small-cap shares, treasury bills, authorities’ bonds, debentures, etc. other than penny shares.

Also Read;

Remember to behave diligence earlier than deciding on the proper investment alternative in line with your financial goals. 

Conclusion

As we’ve discovered above, penny shares are the ones that exchange at any price much less than Rs. 10. They permit investing in small amounts and assist to earn huge profits if the proper one is found.

They are rather risky and due to that, there can be instances in which the whole investment can be lost. Plus, several scams exist.

That manner penny shares aren’t for everyone. Extensive studies need to be carried out earlier than investing out to spend money on such shares.

Somil Gour
Somil Gour is an intern content writer at Insiderpedia. Have experience in sales and marketing. Pursuing BMS from Jagran Lakecity University. He has great ambitions to have a government job in RBI and secure some challenging position.