Penny Stocks

Penny Stocks

Penny stocks are known for their high risk, high return feature. Usually the companies whose stock price is less than Rs. 10 per share are known as penny stocks. Penny stocks have lower liquidity but highest volatility, making them very risky for common investors.

Key Features of Penny Stocks

Lack of Liquidity

Penny stocks are illiquid in nature. One may not easily find buyers or sellers for these stocks due to this. Hence, trading or investing in penny stocks should be done with utmost caution.

Highly Volatile

Penny stocks trade in a highly volatile manner. This means there is an immense fluctuation in prices of these stocks. Thus, investing or trading in these stocks should be done very carefully.

Limited Information

Penny stock companies generally have limited public information available. This makes researching these stocks a difficult task.

Potential Multibaggers

Since the prices of these stocks are less, chances of finding a potential multibagger remains. Investment in fundamentally good penny stocks has the potential to create immense wealth for investors.

Details of Penny Stocks

Vodafone Idea, Suzlon Energy and Jay Prakash power are examples of penny stocks trading on Indian stock exchanges. All of their share price trade below Rs 10 as of Apr 13, 2023.

Evaluating Penny Stocks

• Financials

  To effectively analyze any stock, let alone penny stocks, one should have a deep understanding of the financials of a company. In the case of penny stocks, the importance of analyzing the financial position of the company increases as these stocks are not that much in the limelight.

• Trading Volume

  The trading volume of penny stocks should be adequate. Predominantly, the trading volume of penny stocks are low. However, if it is too low that can be a red flag. So, one should look for penny stocks which have a decent level of trading volumes.

• Management Information

  Before investing in any penny stock, an investor should deeply understand the management of the particular company. This is because the management drives the operations of the company and they should be competent enough to do the same.

• Debt Levels

  Before investing in a penny stock, the debt levels of that company should be examined. The debt levels should be appropriate and the company should have the ability to pay off this debt.

• Pledged Shares

  One of the critical components to examine before investing in a penny stock is to see whether a large number of shares of the promoters are pledged or not. If the proportion of pledged shares is high then it can be a cause for concern.

Who Should Invest in Penny Stocks?

Penny stocks may be suitable for speculators, risk-tolerant investors, those on a budget, and experienced investors seeking diversification. However, they are at higher risk due to their volatility and rapid price changes. Careful research and understanding of risks are crucial before considering penny stock investments.