What are penny stocks?
Investments in penny stocks are low-investment, high-risk propositions. Penny stocks are generally considered far riskier than the stocks of larger companies, as there can be wide fluctuations in their prices. Moreover, there is little information available about their performance and financial status. However, these stocks are more vulnerable to fraud and scams. You should do research and exercise caution before investing in these stocks.
Penny stocks are shares of small companies that are traded at less than ₹10 per share. Please note that we are referring to the market value of these shares and not the face value. For instance, an Infosys share has a face value of ₹5, but this does not make Infosys a penny stock because its market price is several times that amount.
Features of penny stocks
Some of the characteristics of these stocks are as follows:
Low cost
Penny stocks trade at prices less than ₹10 per share.
Higher returns
If the company is making profits, there are greater chances of higher returns as the dividends are declared on the face value of the shares rather than on the market price.
Price volatility
The price of these puny stocks can fluctuate widely and often unpredictably.
How to buy penny stocks in India
You can buy penny stocks by following specific steps as discussed below.
- Open a brokerage account with a broker who deals with penny stocks.
- Complete the Know Your Customer (KYC) process. You need to furnish the broker with all the necessary personal and financial KYC details as required.
- Provide funds. The broker will require funds in the brokerage account to buy shares.
- Research the shares you intend to buy.
- Place the order. Specify the company’s name, the number of shares required, and the price you are prepared to pay per share. You can complete all of this through the broker’s website.
Why should you invest in penny stocks?
Cheaper investments
Since the price per share is less than ₹10, penny stocks are cheaper investments for sure.
Possibility to make profits overnight
You can make a neat profit if you do your homework properly. Since the investment per share is very little, even a one-rupee increase in share value becomes a big profit overnight.
Multiplied earnings
Considering the low capital base, every increase in the company’s profits translates into greater earnings.
Conclusion
Investments in penny stock can be rewarding to the adventurous investor with a high-risk appetite. Such investors allocate a part of their investment corpus to experiment with these volatile and unpredictable stocks even as they hedge their investments across other, safer investments.
Penny stocks are more vulnerable to manipulative practices and scams, and unwitting investors might lose their hard-earned money. If you have a high-risk appetite, these stocks may be suitable for a part of your investment portfolio.
Just like with any other investment, profit is not guaranteed, and it is advisable not to put all your eggs in the same basket. Diversify your portfolio.
FAQs
Are there options for trading in penny stocks in India?
No. The market regulator, the Securities and Exchange Board of India (SEBI), has imposed restrictions. So, there are no options for trading these stocks in India.
What is the penny stock rule?
The penny stock rule refers to the regulations stipulated by SEBI on the trade of stocks priced below a specific value. The regulations are meant to protect investors from the high-risk and unpredictable volatility of these stocks. The regulations govern the increased reporting and disclosure obligations of the concerned companies, restrictions on the types of investors permitted to purchase these shares, and the limitations imposed on the methods of trading in these shares.
Which stocks are the best for options trading?
Determining which stocks would be best for options would depend on several factors: the individual investor’s financial goals, tolerance to risk, investment strategy, and time horizon.
A current generic list of popular stocks for options trading would include:
– Infosys
– Tata Consultancy Services
– Reliance Industries
– Housing Development Finance Corporation (HDFC)
– HDFC Bank
Please bear in mind that options trading, as an exercise, is fraught with high risks and is a speculative investment strategy. The investor will need to be conversant with the nuances of the option market and familiar and thorough with that particular company’s stock, and the market conditions of that specific sector.
Are penny stocks good for beginners?
Penny stocks can be risky for beginners. They are low-priced and volatile, which may lead to significant losses. Beginners should focus on building a solid foundation in safer investments.
How high can a penny stock go?
The potential of a penny stock varies widely. Some may become multibaggers, offering substantial returns, while others may remain stagnant or face losses. Research and caution are essential when investing in penny stocks.
What are penny stocks and how do you invest in them?
Penny stocks are low-priced, high-risk stocks. To invest, research companies thoroughly, analyze financials, use a reliable broker, and diversify your portfolio to mitigate risks.
What are the features of penny stocks in India?
Penny stocks in India are low-priced, often below ₹10 per share, making them affordable for retail investors. They are associated with high volatility, minimal liquidity, and speculative nature.
How is a penny stock defined?
A penny stock is a low-priced, speculative stock often traded at less than ₹10 per share. They are associated with high volatility and may lack liquidity and regulatory oversight.
