Ultimate Guide to Penny Stocks Investing | Espresso

All You Need to Know About Penny Stocks

Investing in stocks is a great medium to generate high returns and accumulate wealth in the long run. Different investors use different investment strategies to trade in stocks. One investment tactic that works well for new investors or those looking to foray into a new market is penny stocks.

Published on 21 March 2023

Penny stocks are traded at a low price and have low market capitalisation. The low market price of penny stocks is the prime attraction for investors. However, it is wise for investors to understand penny stocks, the risks involved, the pros and cons and ways to pick the right penny stocks.

Here is all you need to know about penny stocks.

What are Penny Stocks?

Penny stocks in India are shares of small companies with a stock price of less than ₹10. Penny stock companies have very low market capitalisation and are illiquid. These stocks are listed on a small exchange and are very speculative. Penny stocks in India are not under any national-level stocks exchange.

The lack of liquidity, low market capitalisation, smaller number of shareholders and limited information makes penny stocks a highly risky investment. Even though penny stocks are a high-risk investment, they can turn a small investment into a fortune if the penny stock company performs well. However, it is important to select penny stocks that belong to promising companies.

What are the Pros and Cons of Investing in Penny Stocks?

Cons of investing in penny stocks

  • Illiquidity: These equities lack a following in the investment world. Because of a low number of buyers, liquidity in penny stocks becomes a concern for investors.
  • Price manipulation: Traders can also manipulate prices and make the penny stocks appear strong or weak. The price of penny stocks fluctuates rapidly from high to low or vice versa, making them highly volatile.
  • Lack of information: It is difficult to find the financial history of penny stocks in India. You will find it challenging to assess the financial health of the company you wish to invest in. Further, finding the quotation of penny stocks is also a tedious task, especially if the company is new. There may not be enough financial history or a sufficient track record to judge the financial stability of the company.
  • Prone to a scam: When trading in penny stocks in India, there is a high risk of running into scammers. Traders can drive up the price of the penny stock and sell it after the price rises sharply. 

Pros of Investing in Penny Stocks

1. Possibility of high returns: Sometimes, companies might have the potential but lack financial resources to make it big in the business world. Such penny stock investments can generate high and quick returns for investors when the company achieves its potential.

2. Low investment: Penny stocks in India trade at less than ₹10. New investors or investors with limited capital can consider investing in penny stocks to understand the stock market better at low risk of monetary loss. 

3. Investment experience: First-time investors or investors looking to enter into a new, unexplored market can invest in penny stocks. These stocks require low capital, and hence, the risk of loss is limited. 

How to Pick Penny Stocks?

As an investor, if you want to invest in penny stocks, here are five ways to do it:

  • Select companies wisely

Companies that offer penny stocks may do so for various reasons, but that does not mean you should choose all the companies. Instead, check the performance and the reputation of the companies as you would do with regular stocks, and then choose some of the most suitable ones where you want to invest in penny stocks. If needed, ask your financial advisor for some help here.

  • Track the penny stocks

Penny stocks should not be left to sit idle in your portfolio for long and for a good reason, too – this is when an investor is likely to make a loss. Therefore, track the movement of these stocks and buy and sell them accordingly. Since they are quite cheap stocks, the price fluctuation is greater, and the prices often crash drastically.

  • Keep the penny investments low

Since penny stocks are cheap, many investors are tempted to invest only in penny stocks. However, it is safer if you keep the investment in penny stocks to a certain limit. That way, if the stock market fluctuates in an unpredictable manner, your other investments will hold your portfolio together even as your penny stocks crash.

  • Sell at the right time

As you may be aware, the volatility of penny stocks is what makes them risky. Do not get greedy and wait for the prices to keep increasing as penny stocks rarely touch such a high. What you can do is set a limit where the price is high enough for a reasonable sell transaction and go ahead with it. This can be a safer way to deal in penny stocks than waiting too long until the prices suddenly drop.

  • Only invest a limited amount

Penny stocks should not be the most important component of your portfolio; in fact, to play it safe, invest only a certain amount of money that you do not mind losing if your penny stocks crash. This way, you need not let the losses eat into your other investments. Penny stocks should only take up a minor portion of your investments and be more of an experimental investment.

To Sum it Up

Overall, trading in penny stocks is risky. However, if you do proper research and study the markets well, you can reduce your risk and improve your chances of generating potentially quick profits.
Also Read: How to earn profits in share market?

Chandresh Khona

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