For most of the penny stocks, very little information is available in the market, barring a few larger companies that are in the penny stocks category due to grave underperformance. Because they are so low-priced, there are chances that they may become multi-baggers in the future.
Get the essential details about Penny stocks here.
What are Penny Stocks?
Penny stocks are stocks that are priced very low, mostly under Rs 20 per share, and such companies have low market capitalization as well. A company’s market cap is the value of outstanding shares trading in the market.
Features of Penny Stocks
The features of penny stocks are listed below –
Illiquid
Penny stocks are illiquid in nature. This means that they are traded much less in quantity as compared to other stocks in the market. By illiquid we mean you might find it difficult to find buyers and sellers for such stocks in the market.
Return
This is a tricky one. Most claim that penny stocks give very high returns, it would be wrong to assume so.
While it is true that since the stocks are priced so low, there is a high potential of the stock prices to go up to a couple of 1,000s and giving you higher and faster returns when compared to companies that have already reached that stage; it is also true that you would then be treading in tricky waters. There is no guarantee that the stocks wil l become multibaggers.
To know at that nascent stage that the stock will give you stupendous returns is like taking a shot in the dark because mostly there won't be much information available.
Multibagger
Some of these Multibagger stocks have the potential to evolve into multi-baggers. It means shares which yield in multiples of the investment amount. If a 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 choice of penny stocksto 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.
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.
Pros and Cons of Penny Stocks
Investing in Penny Stocks comes with lot of advantages as well as risks. Have a look at th following pros and cons of penny stocks before starting your investment.
Advantages of Penny Stocks
- Penny stocks are extremely volatile, yet they have the potential to produce extraordinary gains. They have the potential to deliver rapid growth in a short period of time, making them a popular choice among investors.
- With a tiny amount of money invested, you can make significant profits.
- The bulk of penny stock traders start with small amounts. An individual with Rs.10000 to trade may only be able to purchase three or four shares of a blue-chip company. They might buy thousands of penny stock shares for the same amount of money.
- Not all penny stocks experience rapid price movement. Those that do, on the other hand, tend to cause huge price changes in days rather than years.
Disadvantages of Penny Stocks
- Due to a lack of liquidity, holders find it difficult to cash out. Penny stocks are frequently traded in low volumes.
- Artificially increasing share prices may result in false representations about the company's position, a sort of fraud in microcap stocks known as the "pump and dump" approach.
