What is a penny stock?
Penny stocks are shares of companies that trade for less than ₹10 per share. These stocks are highly speculative and volatile investments, since the companies they represent often have very little capital and are relatively unknown. This means there is a higher risk associated with penny stock investing than with other forms of investment.
How to invest in penny stock?
In India, penny stocks can be found on the Bombay Stock Exchange (BSE) as well as the National Stock Exchange (NSE). These stocks tend to be particularly popular among novice investors who are looking to make a quick buck in the market. On the BSE and NSE, penny stocks usually have a market capitalization of less than ₹50 crore and may not have a large degree of liquidity.
Due to their high risk and potential volatility, investing in penny stocks should only be done by experienced investors who understand how to properly evaluate these companies. This includes researching their financials and business model, as well as monitoring their news releases and other public information sources.
Benefits & risks of investing in penny stocks
Benefits of Investing in Penny Stocks:
- High Profits: Despite their higher risk level, penny stocks have the potential for high returns due to their low prices and relatively large share volumes. A small investment could result in a substantial profit if you pick the right stock at the right time.
- Low Entry Barriers: With penny stocks typically costing between 1 to 10 rupees per share, they present an attractive opportunity for those with limited funds who may not be able to afford traditional stocks that cost hundreds or even thousands of dollars per unit.
- Increased Diversity: By investing in penny stocks, investors can increase portfolio diversity without having to commit large sums of capital that would otherwise be required for other investments. This provides an ideal platform for testing out different strategies or diversifying risk exposure without placing too much capital at risk.
- Leverage Potential: Margin trading can enable traders and investors alike to magnify potential profits from certain movements in penny stock prices while also allowing them greater access to these markets than would ordinarily be possible when trading with cash alone.
Risks of Investing in Penny Stocks:
- Volatility: Penny stocks are more volatile than traditional stocks and can experience larger price swings in a shorter amount of time, usually due to low liquidity levels. This can cause investors to lose money quickly if they make the wrong investment decision.
- Unreliable Information: Due to the limited financial information available for penny stocks, it can be difficult to assess their potential profitability or value. Investors may not have access to reliable financial data or research regarding the company’s operations, which could lead them to make uninformed decisions.
- Fraudulent Activity: The lack of regulation on penny stocks makes them vulnerable to fraudulent activities such as insider trading, which could result in investors incurring significant losses if they purchase shares based on non-public information.