What are penny stocks and should you buy them?

Penny stocks are stocks that are traded at very low prices. Typically, stocks trading at less than Rs 10 are categorised as penny stocks although the capital market regulator has also laid out various guidelines for exchanges before classifying any stock as a penny stock. They are considered high-risk investments due to low market capitalisation and lack of liquidity. However, many investors choose to invest in penny stocks because of their potential to give high returns. 

Is it beneficial to invest in penny stocks? 

One of the main benefits of investing in penny stocks is the potential for high returns. Because penny stocks are priced lower than blue-chip stocks, they have the potential to generate large returns in a short period of time. For example, if a penny stock increases in value by 100%, the return would be significant even with a small investment. 

Another benefit of investing in penny stocks is the opportunity to invest in companies that still need to be established or have yet to be discovered by the general public. These companies may have strong growth potential and can be a good opportunity for investors to get in early and potentially see large returns. 

Some features of penny stocks: 

Since they are priced usually under Rs 10, it makes them affordable for small investors. 

They have low market capitalisation, meaning the total value of all shares issued by the company is low. This makes the stocks riskier than high-market-cap stocks.  

They can be highly volatile, making them susceptible to high price swings in a short period of time. This makes them a risky investment proposition.  

Penny stocks are also less likely to be covered by analysts, making it harder to analyze company fundamentals.  

How to find penny stocks?

There are several ways to find or choose penny stocks. Here are a few: 

Use online tools such as stock screening websites or apps that filter stocks based on certain criteria, such as price or market capitalisation. 

Research micro-cap companies that have the potential for high growth. These companies may be in emerging industries or have new products or technologies. 

Read financial news and reports for information about companies that may be undervalued or overlooked by the market. 

Be aware of the risks associated with penny stocks, as they are often more volatile and less regulated than larger, more established companies. 

Are penny stocks risky? 

The prices of penny stocks are often highly volatile, and so, their value can fluctuate rapidly. Additionally, many penny stocks need to be listed on major stock exchanges, making them harder to buy and sell. It’s also important to be aware that many penny stocks are issued by companies with no real operations or assets or are frauds. 

Lack of liquidity:

Penny stocks often trade infrequently and in small quantities, making it difficult to buy or sell these shares at a fair price. 

Lack of financial information:

Many penny stock companies are not required to file regular financial reports with the Securities and Exchange Board of India (SEBI). This makes it difficult for investors to assess their financial health. 

Lack of analyst coverage:

Due to their small size and lack of liquidity, analysts often do not cover penny stocks, making it difficult for investors to get a sense of the stock’s potential. 

Manipulation:

Penny stocks are more susceptible to manipulation by insiders or unscrupulous traders, who may artificially inflate the stock price. 

Volatility:

Penny stocks are often more volatile than larger, more established companies, meaning their stock prices can fluctuate wildly. 

Limited history of profitability:

Often, penny stock companies are young, and they don’t have a long history of profitability, making it difficult to predict their future performance. 

Conclusion 

Investing in penny stocks can be a high-risk, high-reward investment opportunity. It’s important to do your research, understand the market before investing, and limit the amount you invest to a small percentage of your total investment portfolio. Penny stocks can be a good investment opportunity for those who are willing to take on high risk and have a good understanding of the stock market. 

FAQs 

Q. What are the top 10 penny stocks? 

The top 10 penny stocks are YES Bank, Reliance Power, Vodafone India, Bank of Maharashtra, Suzlon Energy, Trident, Indian Overseas Bank, Rail Vikas Nigam, Adani Total Gas, and Raymond. 

Q. Is it profitable to buy penny stocks? 

India’s penny stocks provide above-average returns compared to other stocks or mutual funds.  

Q. How to identify the safest penny stock? 

Penny stocks with high sales, profit growth, and low P/E ratio compared to the industry could be among the safest buys.