Penny Stocks – Multi-baggers or bankrupt?

Last updated on May 15th, 2021 at 09:18 pm

Penny Stocks – Multi-baggers or bankrupt?

What is a penny stock?

A penny stock is a share or stock, trading at a very low price. Generally, stocks with prices below Rs 10 are considered Penny Stocks. Shares of a company with a market capitalization of less than Rs 100 crore are considered as Penny stocks.  There are many (almost 20% – 25%) stocks listed on the Bombay Stock exchange (BSE) and trading below Rs 10.

Some popular Penny stocks in India are listed below.

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Penny stock success stories

Some stocks take as much as 10-20 years to turn around and give high rewards. However, the rewards are huge against the investment and that makes the investors millionaires. Some of such successful stocks are listed below:

• United Phosphorus Ltd (UPL).: The share was trading at Rs 3 – Rs 4 in 2003. From 2005 onwards, the share stock was continuously trading above Rs. 50. The current share price of UPL is Rs. 756.
• Kotak Mahindra Bank:  The bank was trading below Rs 10 in 2003. In 2008 before the recession, the stock price was trading around Rs. 300. Today the stock is trading at Rs. 1,229.
•  Titan: Until 2005, Titan was a penny stock. The stock is trading at Rs 933 today.

There are many such companies giving crores of gains to investors. Having said that, there are many investors who have lost a lot of sum in penny stocks too.

Is it worth investing in Penny Stocks?

Penny stocks are not very popular amongst the retail traders at large. Many consider these shares of low value as a gamble and restrict themselves from investing in it. Since the market capitalization of such companies is low, they are infamous and retail investors feel that such companies can anytime become worthless or vanish and the investments will be lost.

At the same time, some traders strongly believe that investment in carefully selected Penny Stocks can certainly give you high rewards. And, since the value of the investment can be restricted to a few thousand or lacs, the investment amount need not be very significant.

One can not deny either of these views. Hence, it is of utmost required to understand the cons or Risks before investing in Penny stocks.

Disadvantages / Risks :

• The major risk of investing in the penny stock is that the fundaments of the company can be weak. This is one important reason for such a low share price of the company.
• Many penny stock companies are ultra micro-companies with low market cap and low turnover. As a result, the data related to these companies is not readily available for research and investments.
• This further makes them an easy target for unscrupulous manipulation by operators. The price of the stock can be managed by cornering a large quantity of the stock and sending the price to soar or selling a large quantity and reducing the price.
• Due to the low market capitalization and low scale of operations, the compliance to Stock Exchanges by such companies is very casual and cannot be relied upon. SEBI recently delisted 2000 such companies due to non-compliance. In such a case, the investors lose their investments.
• Many large or medium scale companies become penny stocks when they are on the way towards bankruptcy.
• Low volumes or insignificant trades are likely in the case of Penny stocks. That doesn’t help an investor as he might not get the buyer when he wants to exit or vice-versa.

How to Invest in Penny Stocks:

Investing in Penny stocks should be very carefully done. In my opinion, one should follow the following rules while investing in a penny:

• Research the stock before investing. Check the fundamentals or check the recommendation by a popular and reliable research Analyst.
• Invest in small amounts. Generally, less than 10% of the portfolio amount can be invested in Penny stocks.
• Monitor the performance regularly.
• Keep a strict stop loss.

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CA Janhavi Phadnis

Chartered Accountant and Fintech Professional. She has worked with corporates for 14 years with expertise in Forex-Treasury, Accounting, and Corporate Tax.
She can be contacted at info.financepost@gmail.com

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Disclaimer: The above content is for general info purpose only and does not constitute professional advice. The author/ website will not be liable for any inaccurate / incomplete information and any reliance you place on the content is strictly at your risk.

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