Penny Stocks

What are Penny Stocks?

Penny stocks are a form of market traded security which attracts minimal pricing. These securities are mostly offered by companies with lower market capitalisation rates. Therefore, these are also called nano-cap stocks, micro-cap stocks, and small-cap stocks, depending on the company’s market capitalisation.

A company’s market capitalisation rate is determined based on the product of the current price of its shares or stocks and the number of outstanding shares i.e. NAV of shares x number of outstanding stocks.

Based on this factor, companies are indexed in recognised stock exchanges such as National Stock Exchange and Bombay Stock Exchange. Penny stock lists are often found in the lower sections of such stock exchanges or lesser-known stock exchanges.

The following table demonstrates the classification of companies based on their market-capitalisation rates –

Penny stocks in India are, therefore, released by companies with market capitalisation lower than Rs. 5,000 Crore.

What are its Features? 

The features of penny stocks are listed below –

• High-returns: These stocks provide much higher returns compared to other forms of securities. As such shares are issued by small and micro-cap companies, they have vast potential for growth. Consequently, penny stocks are risky, given its intensity of response to market fluctuations.

• Illiquid: Penny stocks in India are illiquid in nature, given the fact that the companies issuing them are relatively unpopular. It becomes challenging to find individuals who are willing to purchase these stocks, thus offering little aid during emergencies.

• Low-cost: In India, penny stocks are usually priced lower than Rs. 10. Therefore, you could purchase a substantial amount of stock units from penny stock list with a small scale investment.

• Unpredictable pricing: Penny stocks might not attract adequate pricing during the sale. It might result in a lower or non-existent profit margin. Similarly, these stocks could also attract a price significantly higher than your cost; therefore, resulting in a considerable profit.

Why Should You Invest in Penny Stocks?

Penny stocks can be considered a hit or miss security. Companies issuing them might grow into a large organisation and yield higher than average returns or tank in their initial years, incurring huge losses.

Despite these insinuations, penny stocks should be included in your portfolio. Here are the following reasons as to why –

• Multibagger:

Some of these stocks have the potential to evolve into multi-baggers. It means shares which yield in multiples of the investment amount. If specific security reaps double its investment amount, it is called a double-bagger, and if it returns ten times its investment value, it is considered a ten-bagger.

Including them in your portfolio could exponentially increase your return prospects and might outperform the large and mid-cap funds. However, conduct thorough research into the penny stocks list to gauge which stocks have the potential to be multibaggers.

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 considered a ten-bagger.

• Inexpensive: 

Investing in these stocks is comparatively cheaper. Hence, you can invest in them without losing any significant portion of your investment finances. Allotting a small portion of your portfolio to purchase the best penny stocks for 2019 in India would still allow you the leeway to invest in other, more secure investment options while considerably reducing the risk factor associated.

What are the Risks Associated with Penny Stocks?

Given the scale at which the companies offering such stocks operate, they are prone to huge risks. These stocks heavily rely on the market conditions for growth in their value.

Apart from the basic perils which come with any market-linked securities, there are other forms of risks associated with penny stocks. These are –

• Limited information: Given the fact that companies issuing penny stocks are start-ups, there exists a dearth of information on their financial soundness, past performance, growth prospects, etc. Individuals might end up investing in them half-wittingly. Therefore, conduct thorough research into the list of penny stocks in India before investing.

• Scams: Penny stock scams are commonplace in international financial history. One such popular method is “Pump and Dump”. Companies and scammers purchase a considerable amount of penny stocks resulting in value inflation which attracts other investors to follow the hype.

However, once enough buyers have invested in such stocks, such companies and scammers dump their shares. This results in an immediate lowering of value followed by losses on the scrupulous investors’ end as they try to sell it.

When you are browsing through the list of penny stocks in India, ensure to conduct thorough research on the respective companies. Gather information on their financial soundness, stability, growth prospects and any track record on their operations.

Companies with integrity and potential will offer the customers enough knowledge of the mentioned factors to make informed decisions.

What are the Alternative Options to Penny Stocks in India?

Individuals can also decide to invest in other investment options which are better suited to their objectives and risk appetite. Mutual Funds are one such option which is increasingly gaining popularity in the market. MFs are investment pools which involve multiple individuals investing in a single fund which is then used to purchase securities.

A few Mutual Funds investment options are listed below –

1. Large and mid-cap equity funds: This kind of MFs is employed to purchase equity shares and stocks from large-cap and mid-cap enterprises. These funds have moderate return capacity and entail lower risk compared to penny stocks.
2. Debt Funds: These funds are used to purchase fixed income securities and come with a lower risk factor. However, the return potential on such funds is limited to 12%.
3. Hybrid Funds: These funds are employed to purchase a mixture of market-linked and fixed income securities. Depending on the constitution, the risk and return factor varies. Hybrid Funds are a great option to diversify your investment portfolio and balance the reward and peril elements of it.

These funds comprise of a massive volume of securities available in the market including large-cap stocks, mid-cap stocks, small-cap stocks, treasury bills, government bonds, debentures, etc. apart from penny stocks.

Remember to conduct diligence before selecting the right investment option according to your financial objectives.