Penny Stocks are considered to be low priced stocks and have often attracted customers for the same. But, are these stocks worth investing? Do they provide high returns? Such questions have often clouded investors. Even at times, people fail to understand the risk factors associated with these stocks.

 Let’s learn in detail on how to buy penny stocks.

What is Penny Stocks?

Penny Stocks are market traded security. These stocks are of those companies which have a low market capitalization. The market capitalization of the company is also what determines whether a stock is to be termed as a nano-cap stock, a small-cap stock, or a micro-cap stock.

How is the Market Capitalization determined?

The market capitalization of a company is determined by the current price of the stocks multiplied by the number of outstanding stocks. Taking this into consideration, the companies are indexed into Nifty and Sensex.

What are the features of Penny Stocks?

These are some of the features of penny stocks, namely:

• High-returns from stocks: These stocks are known for their high returns and are considered to have vast and are of micro-cap and small-cap companies. But, on the negative side, these stocks are risky and can cause loss to the investor.

 

• Illiquid: The stocks are highly illiquid since the companies providing them are start-ups and not well-known.

 

• Very low costing: The prices of these stocks can be as low as ₹1. As a result, investors can obtain large quantity of stocks with very low investment.

 

• Unexpected pricing of stocks: These stocks do not attract the price during sale but may sometimes result in low profit margin.

 

How to choose Penny Stocks?

• Checking if the chosen stock is right or not:

An investor must remember that although penny stocks are low-priced, they have some possibility of recovering their lost value. Thus, such funds should be invested in those stocks that have a low risk factor.

• Understanding market situations:

Taking help from a financial advisor should help an investor take decisions regarding investments and may help in choosing the penny stock and gaining better results.

• Conducting robust research about the company:

Sometimes, attractive advertisements can mislead an investor into buying diluted stocks. But, by thoroughly analyzing the market and taking help of a financial analyst, one can be protected from such cases.

• Practicing day trading through paper trading:

Before one moves completely to penny stocks, he/she should start investing using paper trading to understand the trading practices. This can be done using demo accounts.

• Monitoring investments regularly:

Every individual should be clear about the stocks he/she is investing in. Also, the penny stock should be reviewed and monitored regularly before executing the desired investment.

• Preparing an investment horizon:

The deployment of funds plays an important role. Investors should be also aware of the instances of the price control of penny stocks. Also ensure that the investment objective is fulfilled. 

• Understanding stock price value:

Overviewing of the financial statements of a company before one starts investing in any penny stock is important. Ultimately, the stock price is going to determine the company’s market value.

 

What are the Advantages of Penny Stocks?

Although these stocks can incur high percentage of losses, they should still be included in an investor’s portfolio. Why? Here are the reasons:

1.     Multibagger:

Penny stocks can carve their way to becoming multi-baggers. These stocks can yield in multiples of investment amount which means if the investment is doubled; it is called a double-bagger and if the investment increases by ten times, in is called ten-bagger.

2.     Inexpensive:

Compared to other stocks, each piece of penny stocks is inexpensive. Thus, investing in them will not affect a high portion of an individual’s finances. By putting funds into the best penny stocks, one can plan a secured investment option and reduce the risk factor associated with it.

What are the Disadvantages of Penny Stocks?

Stock market is a volatile market. Thus, while on one side, the penny stocks can provide returns, on the other hand it can also come down in bear market. The risks associated with penny stocks are:

1.     Restricted information:

Buying penny stocks of companies that have just entered the market can be risky for the individual lacks the information about company’s current financial soundness, past conduct and growth prospects. Therefore, a thorough research on these stocks is required before investing.

2.     Scams:

Several companies purchasing a considerable amount of penny stocks can later result in value inflation and attracting other investors to it. Thus, if a company that has invested high amount of capital in the stock withdraws its funds in one go, the market capitalization of the stock can crash.

Points to remember while investing in Penny Stocks

• Make sure there is a wide diversification of one’s portfolio and contains a basket of penny stocks along with blue chip companies, large-cap and mid-cap companies in that portfolio.
• Continually monitor the performance of the investment on a regular basis.
• Make sure only small amount of money is invested in such risky stocks.
• A strict stop-loss limit should be set
• Research reports that present extreme image of such stocks should be treated with caution.

 

Want to start investing in Penny stocks? Join SMIFS and open your free demat account now. Our research team will always be at your service, providing you stock recommendations along with free call-n-trade services.

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