Basics of Penny Stocks
In India penny Stocks are those stocks whose value is less than Rs10. The market cap of penny stock is less than 100 crores or around 100 crores. The liquidity of Penny stock is very low that’s why their bid-ask spread is way large. The prices of this type of stock are manipulated by the promoters. This stock has a high chance to get delisted from the stock market. Penny stocks are loss-making companies with negative to zero profits. The prices are manipulated by the management of the company by creating fake news of the company. You should stay with this type of stock because nowadays many YouTube channels and telegram channels are promoting news of the penny stocks to increase the growth of their channel. Most news related to penny stocks is fake. We also do not suggest to our students and investors any penny stocks for investment until the information is true.
Why Penny Stocks attract the Investor?
There are 161 stocks whose price is below Rs10 and 1171 stocks whose prices are below Rs20. They are presented in a very large volume.
The main reason for buying a penny stock is that an investor can get a large number of shares at a small total value. For example, if a company’s market price is Rs.9, you can buy 1,000 shares for just Rs.9,000. On the other hand, if you were to pick a BlueChip company with a current market price of, say, Rs.1,800, you would only get five shares. The hope is that the penny stock will give superior returns as the stock price is low; with 1,000 shares, you can benefit a lot.
In reality, stocks backed by companies with good fundamentals, financial health, and strong management are likely to give good returns in the long run, no matter what the share price is.
Buying a stock just because the price has fallen 50% from its peak is not always a good proposition. You may end up in a value trap. Investors who go hunting for bargains in the initial phase of a bear market also get into the value trap.
Reality– Research shows that average yearly returns for penny stocks are roughly minus 30 percent per year
Risks Associated with Penny Stocks
Lack of Information- Since penny stocks are usually issued by a startup or growing companies, there is hardly any information available about the company history and its financial soundness. Therefore, there are high chances that you could invest in a company that may not have growth prospects leading to a decline in share prices.
Illiquidity- Buying penny stocks are easy, but given the low popularity of the companies, it can become challenging to find out buyers for your stocks when you wish to liquidate them. During emergencies, it can be very difficult to find out potential buyers who are willing to buy the stocks of such companies, resulting in poor liquidity.
Scams- If we take a look at the history of scams, penny stock scams have been very common. One of the common scams associated with penny stocks is the Pump and Dump strategy. Companies and fellow investors buy a considerable number of shares to inflate the prices, which attracts other investors to buy the stocks.
Examples of Penny stocks
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