Penny stocks is a stock that trade at very little prices, usually below 50 rupees. They have a small market capitalization and are mostly illiquid. Penny stock are less well known to the general investing public. I Investors steer clear of them as information about their fundamentals and companies is unreliable or unavailable. However, penny stocks are known for producing multibagger returns in a few trading sessions.
Because penny stocks are illiquid, sometimes just a few orders can cause the exchange to reach its trading limit. These stocks tend to generate higher returns when they have been in the upper circles for several days. In general, this period of hitting the circuits is not accompanied by trading volumes. Sometimes there is a strong important story that drives the stock higher. In other cases, it may simply be manipulation by brokers. They artificially inflate the price and quantities to attract innocent retail investors. Once they have enough traders contributing in the shares, they would give up their own holdings. Now that we understand how penny stock work. Let’s see why penny stock are called “penny” stocks
Penny stocks aren’t called penny stock for Nothing!
Also, Penny stocks trade at such low values for a reason, because most traders who buy penny stocks don’t even bother with them and try to get out sooner or later once they’ve made decent returns. Penny stocks in India often do not comply with stock exchange regulations. They are not even transparent in their reports.
They only move when there is news or change stories about penny stocks. Speculation leads to an increase in trading volume and prices rise. But very insufficient of them turn out to be true or really strong on a fundamental basis. Any negative news will drive the price down.
Things To Consider When Buying Penny Stocks
The risk of a penny stock going bust is just as high. The business may suddenly close or there may be very little chance of multi-packer returns. The total capital worth investing in penny stock should be no more than 2 to 3 percent of the value of a person’s portfolio.
Investing in penny stocks is primarily speculative. Investors should avoid investing in them in the first place, and if they buy any, it should be treated like buying a lottery. You should never get emotionally attached to them in the hope of receiving good news.
Investors should also not follow a buy-and-hold approach, even if they have performed well recently. Because over time they are neither capable of generating value for shareholders nor do they follow a transparent information system. Investors should also thoroughly research stocks and news in the public domain and not become victims of conspiracy by traders who then dump their holdings after manipulating the price.
The transaction cost for some penny stocks is also higher, and for some, brokerage is charged per share. Likewise, when stocks are trading at a very low price, the spread between the bid and ask price also turns out to be significant in percentage terms.
The stocks mentioned in the watch list were determined by taking into account news, speculation, the trend in their price chart, and some fundamental factors, such as debt-to-equity ratio and cash flows.
But this information will vary from day to day depending on the news flow and an investor should do some relevant background checks on his ability before investing in these stocks.
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