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Understanding the basics of investing
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.
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Features Of Penny Stocks
- 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.
- Illiquid: Penny stocks in India are illiquid in nature, given the fact that the companies issuing them are relatively unpopular.
- 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.
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Why Should You Invest in Penny Stocks?
- 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.
- Inexpensive: Investing in these stocks is comparatively cheaper. Hence, you can invest in them without losing any significant portion of your investment finances.
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What are the Risks Associated with Penny Stocks?
- 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.
- 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.
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