What are Penny Stocks

Penny Stocks Meaning Are these Investment Jackpots???

Companies with share prices on the low end of the market are known as “penny stocks.”

Penny stocks are one of the most loved investment options of retail traders and investors because of 2 simple reasons: 

  1. Low pricing and
  2. A strong feeling is that the share will become a multi-bagger and help earn huge profits.

The above 2 reasons are more than enough to lure beginners into buying penny stocks. 

I totally agree with the fact that penny stocks can make you rich overnight, but I also strongly believe that they have the potential to wipe out all your money in a single day as well.

How can they be multi-baggers? How can they wipe out all your money? What are penny stocks? 

All these questions will be answered in the below article. Let’s get started!

Content:

What are Penny Stocks?

Penny Stocks are companies whose share price is very low. Penny Stocks are very illiquid, meaning they are not traded frequently. Penny stocks have a market capitalization of less than 100 crores and there are close to 2000 + penny stocks listed in the Indian Stock Market.

Investing in Penny Stocks – Things to keep in mind

Illiquid

Penny Stocks are very illiquid, meaning there are no traders actively buying and selling them. Let’s say you buy 100 penny stocks today and want to sell them tomorrow. You might not be able to sell as there will be no buyers for that particular stock.

And this is why you should know what is Liquidity in Stock Market.

Prone to Manipulation/Scams

Large buyers can manipulate the prices of the stock by moving the price up or down at their own wish. They place buy orders at higher price levels, and the price of the stock starts moving upwards. 

Once the stock price moves up, a rumor is created via social media, sms, etc. Hearing the rumor that a penny stock is performing well, and expecting that it will further move upwards, investors get pulled into buying the stock, and that’s when the large buyers will start selling the stocks. 

Company Fundamentals

Usually penny stocks have very little information about their financials like past performance, growth prospects, etc. 

So if you are investing in penny stocks, you need to be aware of the complete fundamentals of a company like: companies revenue model, the top management, profit margins, future growth, return on equity, etc. All in all you need to assess the overall fair value of the stock.

Options Trading

A lot of options contracts in the stock market are illiquid. Such options contracts are used by tipsters to defraud the investors. 

Here’s how they do it: they will give you a tip to buy a certain options contract, once you buy, the price of the options contract will move up. Once it moves up, tipsters will sell the same options from their account. This will create a loss in your account and profit in the tipsters account. 

In the end the price will never move up due to extreme illiquidity and all your money will be wiped out in one shot!

But options trading is not all negative. It is a deep topic, and with proper knowledge, you can have excellent returns. To know what is options trading? Click here.

Can I make money in Penny Stocks? – Advantages

High Returns

Penny stocks are known to provide higher returns than small cap, mid cap or large cap companies. 

Low cost

As explained above, penny stocks are usually priced very low. This will allow you to buy substantial numbers of stocks and smaller price movements can help you make large amounts of money. 

For example: Let’s say you bought 10,000 shares at ₹ 10 in 2020. The company did well during the year, and in 2022 the value of the share price rose to ₹ 30. In this case, you would make a profit of ₹ 2,00,000.

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Quick Summary

  • Penny Stocks means the stocks of companies that are usually traded at a very low price.
  • Penny stocks have a market capitalization of less than 100 crores and there are close to 2000 + penny stocks listed in the Indian Stock Market.
  • Penny Stocks are very illiquid, meaning there are no traders actively buying and selling them. 
  • Large buyers can manipulate the prices of the stock by moving the price up or down at their own wish.
  • If you are investing in penny stocks, you need to be aware of the complete fundamentals of a company.
  • Penny stocks are known to provide high returns compared to small cap, mid cap or large cap companies. 
  • Penny stocks are usually priced at a very low cost. This will allow you to buy substantial numbers of stocks and smaller price movements can help you make large amounts of money.

Disclaimer: The above article is written for educational purposes, and the companies’ data mentioned in the article may change with respect to time. The securities quoted are exemplary and are not recommendatory.

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