Everything You Wanted To Know About Penny Stocks


We at The Multiplier know that you people just love penny stocks. We often receive requests from to come up with penny stock ideas.

So, this post will go about explaining what penny stocks are all about, why they are cheap, how they operate, how you should trade and how you can pull out money from these stocks. Read On....


What Penny Stocks Are All About?

Penny stocks are the shares of companies having market capitalization of less than Rs. 100 Crores with each share trading below Rs. 10. You will be surprised to read that 25% of stocks on BSE and 10% on NSE come under this category.

These stocks can give you super-normal gais or super normal losses. They appear attractive to retail investors because the downside seems limited. The volumes are generally low with big gap between ask and bid. At times you can also find them moving in circuits without any reasons supporting the move. Occasionally you may witness heavy volumes in these stocks

Why Are They Cheap?

Penny stocks are cheap for a reason, the main reasons are dubious promoters, low quality management, poor business model, heavy debts, bad future prospects, bad books of account and non transparent corporate governance. Sometimes these companies might have closed their business years back and the stock still keeps trading in the market. Kingfisher, Jagsons etc. can be few examples. The promoters in such companies usually offload their holdings at higher levels and then move away leaving the retailers trapped.

How Are Penny Stocks Operated?

These companies often have dubious promoters who often enter into nexus with operators. The Operators are usually low reputed investment bankers, who are assigned the job of artificially pumping up the price, which is done through circular trading with fake accounts, taking the price to higher levels. Once the price is pumped up to higher levels the promoters/operators create media frenzy or approach individual investors through sms/mails asking to buy the share. This is the time when the operators and promoters offload their holdings to retailers and move away. The profit is then shared between promoters and operators.

So, its always advised to check the holdings of promoters/insiders before entering such stock.  Before investing in such stock its always advisable to check the recent news and announcements form BSE/NSE .

Benefits of Investing in Penny Stocks:

  • If identified properly they can give you heavy returns in short period of time
  • They are cheap so you can buy huge quantities.
  • Some good companies, due to temporary problems and bad environment may end up as penny stocks. Once market conditions and economy improve they can bounce up and give super normal returns.
  • If you get in at early stage you can reap the benefits of the price pumped up by the operators lateron.

Risks in Penny Stock:

  • High Risk- Due to poor quality management, untrustworthy promoters and bad books you may end up loosing huge on such stocks. Sometimes, the promoters may never return and you can even end up loosing 100%
  • Low Volumes- The volumes are very thin in some stocks. So, if you buy in good quantity you may not be able to sell it when you want and end up getting trapped.
  • De-Listing- The exchange can delist penny stocks to maintain the efficiency. Once, this happens you have no chance to sell your stock

How To Trade Penny Stocks:

  • Must scan the stocks for fundamentals before buying, read this post for details basic fundamental analysis for dummies.
  • Never ever buy any stock on the basis of sms/emails you receive from unknown sources, check it out here monthly sms scam exposed.
  • Look for momentum stocks. Learn basic technical analysis from our articles here
  • Don't buy low volume stocks you may end up getting trapped.
  • Never buy loss making unknown companies, buy good ones or don't buy at all.
  • Don't trade OTC stocks they are poorly regulated and much riskier compared to listed ones.
  • Never put more than 5% of your total capital in any penny stock, no matter how good things appear they are risky.
  • Put stoplosses in place, decide when you will exit if the stock don't work your way, give the stock its time to move if its consolidating

Following above rules will ensure that you don't end up losing while investing in penny stocks. 


Should You Buy Penny Stocks?

Penny stocks  are high risk-high reward gamble and most of the stocks out they are complete garbage and not worth investing. You, should invest only in profitable companies showing some good growth and turnaround in results. High promoter holdings and clean management is always advisable.

But if you are risk averse or don't have knowledge of basic fundamental/ technical analysis then its better to stay away from such stocks.

Conclusion:

In my opinion one should look for value in stocks not for the price. A stock trading at 10,000 rupees can be a hidden gem to invest in and it may evern multiply your capital several folds and a stock at Rs. 2 or Rs. 3 may be complete garbage that may wipe away your entire capital. Stocks like MRF, Bosch, Page Industries etc. have given superb return to investors despite of trading at super high price levels. On the other hand the list of penny stocks that took away investors' wealth is pretty long to be covered in a single post. So, my advice is don't get tempted by low price per share, prices are low for a reason. You may get a Chinese Smartphone for Rs. 1500 and one from Apple for Rs. 60,000 there is a difference in price but for a reason, same is applicable for stocks as well. Buy these stocks only if your are convinced with the fundamentals or futures prospects of the business.

So, the bottom line is you can invest in penny stocks but only when things appear good to you. Don't gamble, when it comes to penny stocks gambling you will loose money most of the time. 


Happy Investing 
The Multiplier



Disclaimar : The above is not a recommendation to buy or sell, but information as available on public domain and it should not be treated as a research report. The contents of this website/blog are only for educational purposes. No liability is accepted for any content on this blog/website . Subject to Gurgaon (india) jurisdiction only. The author is not a research analyst and does not give investment advice, he believes his statements to be true, they always depend on the reliability of his own credible sources. The author recommends that you consult with a qualified investment advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction. No holdings/ interest in above companies for now, we may or may not invest in future.



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