Literally ‘Penny’ means a small sum of money. The term ‘Penny Stock’ almost bears the same meaning. There is no clear definition of these types of stocks. Basically, a stock with a low price amount refers to a penny stock. In the Indian stock market, penny stock can have priced below Rs. 10. These stocks are usually considered highly speculative. In the content, we are going to know penny stocks meaning and analyze the positive as well as negative features of penny stocks of India so that Investors can get benefits from them.
Penny Stocks Meaning
Penny Stocks are those which are worth a penny. So, in simple words, penny stocks meaning are who are low-priced stocks. In general, we take stocks that are 5 rupees or below 5 rupees. Now, you can guess the advantage of penny stocks. You can get a huge quantity of stocks with less capital compared to normal stocks. Now, the question is How to find the best penny stocks of India. Because there are plenty of penny stocks to choose from. Therefore, investors generally feel confused when it comes to finding the best penny stocks.
Things to Remember about the Penny Stocks:
- As penny stock price generally stands at below Rs. 10, price and market capitalization of the issuer company is usually low.
- Before penny stock trading, you need to have a good understanding of penny stocks liquidity. Basically, this is one of the biggest problems with penny stocks; low liquidity.
- Proper, intense research and monitoring are required for the trading of penny stocks. Price movements, records, market capitalization, liquidity, company fundamentals, size, products are some of the most important factors of analyzing.
- A penny stock typically bears the risk for the high level of volatility, lack of liquidity, low capitalization.
- The stock price is extremely low. If a trader invests Rs. 50k for Rs. 1000/share, he will get 50 shares but if he invests Rs. 50k in penny stocks, the number of shares will be near 10-12 thousand.
- If you analyze properly, some of the penny stocks can return huge interest in the long-term.
For example, We are familiar with the name of Mr. Rakesh Jhumjhunwala, one of the Indian billionaire Investors and Traders, bought Titan’s penny stocks at Rs. 4 to 5 (average price), today’s share price is around 350-400, hence he got a huge return.
This doesn’t mean all the penny stocks will turn out to be multibagger. One has to be very careful about choosing these stocks.
- Anyone with a low income can afford these stocks.
- You need to give massive effort to find a good penny stock. As penny stocks issuer company are basically small one, the company’s fundamental analytical details are not always available. Hence, the analysis of these stocks is not so easy.
- If you lack proper knowledge regardings tradings, stock analysis, company details analysis, you should not take risk of trading penny stocks, this may cause loss.
- As I have mentioned above, penny stocks have a very low level of liquidity, it may be hard to find buyers for these stocks. Secondly, low liquidity provides opportunities for some traders to manipulate the price of penny stocks by the pump and dump policies.
- Investors or traders must be careful while trading penny stocks. Investors must be aware of penny stocks scams.
- Generally, most of these stocks do not come with a good return, only a few penny stocks are good.
A chart is given below as an example of penny stocks. Just check their initial price of January 2017, and you will easily understand penny stocks meaning.
The conclusion of the content, ‘what is a penny stock’, is investing in penny stocks considered high risk, but if you have good knowledge about market movements and are a high-risk investor, penny stocks can give you a huge return.
FAQs on Penny Stocks of India
There is no extra or uncommon process of buying a penny stock. It is done in the same way as you would any other stock. Just you need to have a trading and Demat account and bank account as well. You can buy your preferred stocks from there.
If you’re able to select the right penny stocks, they can make you rich obviously. The only difference between penny stock and normal stock investment is you can get a huge quantity of penny stocks with less capital but for normal stocks, it is not applicable. So, only Rs.1-2 movement in penny stocks can give you multibagger profits. Sadly these are penny stocks meaning to many greedy investors.
The first thing you need to do is analyze properly before investing in penny stocks. As there are lots of scams in the market with the name of penny stocks. So, beware of the scams. Then, you need to check the volume of the penny stocks. The volume must be good. Always go with diversified investments. Do not invest all your money in a single stock.
I guess you cannot. Penny stocks cannot be short-selling. You can only buy penny stocks. As per the exchange rules, you cannot do intraday trading also for some of the penny stocks of India.
3 Important Steps to Follow Before Investing in Penny Stocks of India
Investing in penny stocks can be a tricky part. There are lots of them. So, be careful before investing your hard-earned money in them. Here, are 4 most lookouts to follow before investing in penny stocks.
Observe the Trading Volume
Always observe the trading volume before you own penny stocks. A good volume is always important before buying any stocks. Because volume indicates there must be somebody who will eager to buy your stocks when you will sell. Just remember that penny stocks have very low liquidity. Therefore, you need to have a very cautious approach before investment.
Check Qualitative Approach
If you are connected with the share market, you must know that checking the qualitative fundamental approach of a company that you are going to invest in, is very much important. Many investors do mistake by not analyzing the company’s qualitative fundamental factors of penny stocks. They overlook it. But this is not going to be a wise decision for them. Fundamental analysis of companies must be your topmost priority for finding penny stocks.
Analyze the Fundamental Ratios
Whether it is normal stock or penny stock, verify the financial health of a company is necessary. There are some important ratios like debt-equity ratio, market capitalization, return on equity (ROE), earnings per share (EPS), etc. The fundamental ratios will guide to find out the performance and financial health of a company.
What are the Best Rules for Investing in Penny Stocks of India?
Now, if you are quite sure about your investment decision on penny stocks, you should keep in mind these following rules:
Invest Small portion
Make sure that you invest only a small portion of your capital into penny stocks. Penny stocks investment is quite risky as these stocks can easily be manipulated. So, try to keep your investment within 10% of your total portfolio amount.
Do not put all your capital into 1 or 2 penny stocks. Spread your invested capital in a basket of penny stocks. This could lessen your risk factor and maximize your profit. Hence, the sensible decision is to create a penny stock basket and spread the investment and risk across five to six stocks.
You must keep a regular basis track record of your invested penny stocks. As the manipulation and scams levels are higher in penny stocks compared to normal stocks, they require to be watched carefully. Investors must be prepared to see their penny stocks at the slightest sign of trouble.
If you technically analyze the penny stocks, you may see that these stocks don’t move normally. Many of the penny stocks move circuit wise, upper circuit, or lower circuit basis. So always keep a stop-loss for that.
What are the Top Ways to Find Best Penny Stocks of India?
There are different ways by which you can find the best penny stocks of India. But before I come to the details, I just want to tell you the truth. There are unlimited scams happening daily in India through penny stocks. So, think twice before you take other’s suggestions or calls for buying penny stocks. Many times, you may get random penny stocks to buy calls through messages, emails. Just avoid such types of calls. Always analyze on your own before investing in penny stocks.
Create your Own Scanner
You can create your own scanner and analyze which penny stocks are best for you. There are so many scanning platforms are available in the market now. My recommendation is to go with Zerodha Streak, there you can easily create your own scanner and analyze the penny stocks. I personally prefer this scanner. If you have a Zerodha kite account, you can easily access the Zerodha Streak and can create your penny stocks scanner within minutes.
To know how to create your own Penny Stock Scanner you may follow our Youtube Channel. There you will find step-by-step guidance on creating a penny stock scanner.
Though penny stocks meaning are low capitalized companies, fundamental analysis is always necessary before investments. Both qualitative and quantitative factors analysis are required. Check the background, management events, brand value of the company as qualitative factors. In addition to this, check financial reports, balance, ratios to get detailed pictures of the company.
You can do technical analysis also to find out the current trend of the stocks. Try to buy at the beginning of the uptrend and sell-off at the beginning of the downtrend. That’s how the market works. To recognize the uptrend and downtrend, technical analysis is required. By using some of the popular indicators like Supertrend, MACD, RSI, Moving Average you can easily identify the trend and entry-exit level.
Suggestions from Trusted Sites
Do not invest money based on any random mails or message of penny stock buying. Always take suggestions from trusted sites like moneycontrol, zerodha streak scanner, economictimes, etc. For example, I add a screenshot (taken from economictimes site) of penny stocks list top gainers.
Advantage and Disadvantage of Penny Stocks of India
Just like other investments, penny stock investment also has some advantages and some disadvantages too. First, let’s have a look at the advantage of penny stock investment.
Advantages of Penny Stocks of India
- One of the most advantageous points of penny stock investment is its low share price. You do not need to have a large capital rather you could buy large quantity of stocks at a small price.
- The next benefit of penny stocks is its easy availability. Low cost allow you to buy as much as you want. All you need to do is a good analysis prior to investment.
- With 2-3 rupees movement also, you can have huge profits from the penny stocks.
- High-volatility is another reason behind penny stock investment. These types of stocks move at quicker intervals.
Disadvantages of Penny Stocks
- Despite its cheap price, the penny stocks hold huge risks due to its low liquidity. The possibility of generating profits, the chances of losing investments is almost equal.
- As the penny stocks are mostly issued by small capitalized companies, there is a fear of bankruptcy. The whole investment can be lost just in one shot.
- “Pump and Dump” scams are very popular in penny stocks. There some scammers popularize a stock in order to increase the demand, which leads to an increase in price. And in the end, that stock will crash. The investors who take advantage of this are ones who purchased that stock before the scam happens.
We knew in this article, penny stocks meaning and also discussed what penny stocks to buy. However, unlike other normal stocks, penny stocks investment needs extra caution. Do not fall into the trap of any scammers. Try to find good penny stocks on your own and analyze yourself before investing. Penny stocks of India can be a profitable investment option only for them who know how to invest in it in a proper way.