Penny stocks which are also known as micro cap stocks can be hero or zero for investors and traders. Investing in small companies gives more quantity and less quality for example buying 10,000 shares of a penny stock (priced at 1 rupee) instead of a stable company stock that is priced at INR 1000 or more.
We strongly suggest to all our clients to AVOID investment in penny stocks on back of the following reason.
High Risk – Investment in penny stocks is very risky.
There have been cases where people have waited for more price rise in penny stocks, and then got stuck because the price started falling continuously after reaching a certain high level. This is because it is not possible for any investor to judge the appropriate levels of exit from a penny stock, even when it turns profitable. Also there is no guarantee that a penny stock would remain profitable in the long run. There have been numerous examples of penny stocks that were profitable for investors at one point in time, but are now trading around price levels below their purchase price. Before you even know it, many of the penny stock companies may turn bankrupt.
Due low market capitalization of penny stock companies, it is extremely easy for any trader to manipulate the price of penny stocks. Someone can simply buy a huge quantity of these shares with an investment amount of 1-2 crores and cause the stock price to rise. This tends to create an false impression of heavy demand and amateur investors start pumping money in without knowing the facts. This gives the initial manipulator an opportunity to exit the stock with heavy profits, leaving other investors stuck with the penny stock. Some of these instances have even been reported by SEBI.
In case of penny stocks, the quantity of shares available may appear to be quite high but quality is low. For example, a stock priced at 50 paise can easily increase by 5-10 paise in a day making it a 10-20% rally. Due to possibilities of such volatile price movement in any kind of stocks, exchanges generally limit how much a stock can rise or fall in a single day. The same holds true for penny stocks, on which there is a 5-10% limit beyond which price cannot rise or fall in a day for a particular stock. You are likely to face difficulty in buying such penny stocks. Due to non-availability of shares in the market, there may be no sellers at times when there is a huge demand. A similar difficulty could arise when you try to sell the stock.
Trading cost can be expensive
In addition to the usual trading fees, some brokerages charge an extra fee for stocks valued below a certain price.
Lack of Information for Analysis
The information available in penny stocks is less as compare to quality stocks.
So penny stocks is like HERO or ZERO and chances of ZERO is more; so investment for long term in quality stocks is the best strategy for Equities.
Keep Investing, stay healthy & stay safe!
To more about investing in stock market write us at [email protected]