0 What are Penny Stocks: The Ultimate Blog Guide

 

 Penny stocks are a form of market traded security that attracts minimal pricing. They trade at a very low price, have very low market capitalization.

Introduction

Penny stocks are a form of market traded security that captivates the least pricing. These securities are primarily given by corporations with meagerer market capitalization rates. Thus, these are also named nano-cap stocks, micro-cap stocks, and small-cap stocks, relying on the company’s market capitalization.

An organization’s market capitalization price is inferred as based on the product of the existing rates of its shares or stocks and the number of outstanding shares i.e. NAV of shares x number of outstanding stocks. Based on this characteristic, corporations are categorized in prominent stock exchanges such as National Stock Exchange and Bombay Stock Exchange. Penny stock lists are frequently found in the lower sections of such stock exchanges or lesser-known stock exchanges.

The following figure ascertains the category of organizations based on their market-capitalization rates –

1) Large-cap organizations-Rs. 20,000 Crore or above     

2) Mid-cap organizations -Rs. 5,000 Crore – 20,000 Crore               

3) Small-cap organizations - Below Rs. 5,000 Crore

Penny stocks in India are, thus, disclosed by organizations with market capitalization downward than Rs. 5,000 Crore.

 

What are the characteristics of Penny stocks?

The characteristics of penny stocks are listed below –

1) High-returns: These stocks deliver much-increased returns as compared to different forms of securities. As such shares are issued by small and micro-cap organizations, they have enormous expansion potential. Accordingly, penny stocks are dangerous, given their intensity of response to market instabilities.

2) ill-liquid: Penny stocks in India are ill-liquid, given the fact that the companies granting them are relatively undesirable. It becomes disputing to find individuals who are enabling to buy these stocks, thus providing insufficient aid during market crises.

3) Low-cost: In India, penny stocks are usually priced downward than Rs. 10. Thus, you could buy a substantial amount of stock units from the penny stock list with a small-scale investment.

4) speculative pricing: Penny stocks might not captivate adequate pricing during the sale. It might stem from a poorer or non-existent earnings margin. Furthermore, these stocks could also persuade a rate relatively higher than your cost; thus, resulting in substantial revenue.

Why Should You Invest in Penny Stocks?

Penny stocks can be deemed a hit or skip security. Organizations granting them might rise into a massive organization and yield increased than average returns or in their preliminary years, incurring massive losses. Despite these hints, penny stocks should be comprised in your portfolio. Here are the following justifications as to why –

1) Multibagger:

Some of these stocks have the potential to unfold into multi-baggers. It implies shares that yield in multiples of the investment amount. If specific way it means that security reaps double its investment amount, it is called a double-bagger, and if it returns 10 times its investment price, it is supposed a ten-bagger. Comprising them in your portfolio could exponentially boost your return expectations and might surpass the large and mid-cap funds. Still, conduct a thorough analysis into the penny stocks list to assess which stocks have the potential to be multi-baggers.

Example

Mr. A invested Rs. 5000 in penny stocks of G Ltd., an IT start-up. Each unit costs Rs. 5. The firm bid well at the market and their penny stock value stood at Rs. 50 at the end of the FY 18 – 19. Mr. A then sold his 1000 shares at Rs. 50,000, thus gaining ten times the return. This stock is contemplated as a ten-bagger.

2) Inexpensive:

Investing in these stocks is relatively inexpensive. Thus, you can invest in them without missing any crucial portion of your investment finances. Allotting a minor portion of your portfolio to buy the best penny stocks for 2021 in India would yet enable you to invest in some other, more secure investment possibilities while broadly reducing the risk factor linked.

• What are the Risks linked with Penny Stocks?

Given the scale at which the corporations delivering such stocks operate, they are inclined to massive risks. These stocks heavily depend on the market situations for expansion in their price value. Apart from the essential risks which come with any market-linked securities, there are different forms of threats linked with penny stocks. These are –

1) Limited data - 

Given the fact that corporations issuing penny stocks are start-ups, there remains a scarcity of data on their economic soundness, past performance, expansion prospects, etc. Investors might end up financing in them half-wittingly. Thus, conduct comprehensive research into the list of penny stocks in India before capitalizing.

2) Scams -

Penny stock frauds are commonplace in transnational financial history. One such prominent strategy is “Pump and Dump”. Organizations and defrauders buy a vast proportion of penny stocks stemming from value inflation which captivates different investors to follow the hype.

Though once sufficient buyers have invested in such stocks, such organizations and defrauders dump their shares. This impacts an unexpected decrease of value followed by market penalties on the scrupulous investors’ end as they strive to sell it. When you are examining through the variety of penny stocks in India, assure to conduct thorough exploration on the respective corporations. Gather data on their economic wellness, strength, expansion prospects, and any track record on their business operations.

Businesses with integrity and ability will deliver the customers enough proficiency of the mentioned characteristics to make conscious decisions.

• What are the alternative possibilities to Penny Stocks in India?

Individuals can moreover decide to invest in other investment possibilities which are nicely satisfied with their purposes and risk appetite. Mutual Funds are one such alternative that is increasingly gaining vogue in the market. MFs are investment pools that implicate considerable individuals investing in a single fund which is then utilized to buy securities.

• A few Mutual Funds investment alternatives are listed below –

1) Large and mid-cap equity funds: 

This type of MFs is assigned to buy equity shares and stocks from large-cap and mid-cap industries. These funds have intermediate return capability and entail lower risk correlated to penny stocks.

2) Debt Funds: 

These funds are utilized to buy fixed-income securities and come with a lower risk characteristic. Still, the return capacity on such funds is restricted to 12%.

3) Hybrid Funds: 

These funds are assigned to buy a variety of market-linked and fixed income securities. Relying on the constitution, the risk and return factor varies. Hybrid Funds are a tremendous alternative to modify your investment portfolio and balance the reward and risky elements of it.

These funds include a vast amount of securities accessible in the market comprising large-cap stocks, mid-cap stocks, small-cap stocks, treasury bills, government bonds, debentures, etc. apart from penny stocks. Remember to have perseverance before choosing the right investment alternative according to your financial motives.

 

What are Penny Stocks so lucrative among Indians?

·         As far as the creation of income is concerned, the stock markets illustrate a lucrative opportunity. By opening a share trading account, you can trade in the markets and accomplish financial prosperity by capitalizing on the right stocks. And generally, when it comes to earning money, most people manage to stick to well-organized large-cap and stocks.

 

·         While that is a promising technique, investing in penny stocks can furthermore enable you to comprehend your financial objectives. With an online trading account, you can capitalize on penny stocks skillfully. If you’re admiring what penny stocks are, here’s some much-needed data that can enable you to clear things out.

 

Are penny stocks practical to invest in 2021?

 

·         In common, stocks that are priced downward, with poor market capitalization, are generally cited as penny stocks. In the stock market scenario in India, a stock whose current market value is below Rs. 10 is commonly named a penny stock. Owing to the low market capitalization of these shares, penny stocks are not very liquid and are rarely traded. Due to the poor frequency of trading, their rates are prone to immediate and huge phases of volatility.

 

·         Unlike in the case of stocks about blue-chip corporations, foreseeing the price action via technical indicators may not often be logical for penny stocks. This is mainly due to restricting bid-ask, sparse price quotes, and the general lack of price history. However, penny stocks can propose good trading alternatives if you schedule your moves carefully. Once you open a share trading account, you can commence buying or selling penny stocks.

Things you should understand about penny stocks

Now that you understand what penny stocks are, let’s take a glance at some of the fundamental aspects you should understand about these shares before you trade or invest in them utilizing an online trading account.

 

Penny stocks are excellent for beginners

If you’re a fresh investor and you’re just getting commenced with trading in the stock market, penny stocks are commonly promising bets. They propose a considerable level of freedom to experiment, thus enabling you to understand the pros and cons of trading first-hand. Since the price of a penny stock is commonly maintained low, you don’t have to capitalize tons of your wealth to commence trading in the stock. This moreover enables you to keep your losses to a minimum. All you require is a share trading account and some funds to get you commenced.

 

Penny stocks can yield boosted returns

Contrary to prominent belief, not all penny stocks are fated to fail. There are a bunch of impressive corporations with nice financials and expansion capabilities that are being traded for pennies. By specifying these corporations accurately and investing in them, you can develop good returns and supervise your preliminary investment to grow. Still, keep in mind that you might have to clench your investment for an extended period to get favorable returns.

 

 

Penny stocks are commonly low on liquidity

Since the market capitalization of penny stocks is short, these shares are not very repeatedly traded in the stock market. Due to the short volumes of trade, it might be disputing to discover both forthcoming buyers or sellers. You can withstand this constraint to a specific extent by holding the shares of penny stocks for a longer-term. Furthermore, you could approve a staggered buying or selling strategy to grow or exit the shares.

 

Conclusion

While penny stocks can be nice investment alternatives for maximum people, they do carry some perils, almost like all sorts of equity. The price movement of such stocks can be uncertain at times, thereby boosting the danger factor. Still, these perils can be mitigated to a specific extent if you make sure to select the promising penny stock before investing.

 

One means to ascertain the realism and wealth-creating potential of a penny stock is by administering comprehensive crucial and technical research. So, when it comes to investing in penny stocks, it is advisable to abstain from putting too much vigor on others’ viewpoints or projections. You should Constantly assure that you do your analysis on the stocks.