Hello investor amigos!! It is believed that penny stocks are denoted as darlings of new investors, multibagger stocks. Every body dreams to have a list of top 10 penny stocks to buy today or a list top 5 penny stocks to buy today but is difficult create one. The low market price of these stocks makes them a beacon to novices. Nevertheless, there are numerous points that need to be in an investor’s mind before he invests his hard-earned money in penny stocks. In this article, we will discuss all about penny stocks. Let us get started.
PENNY STOCKS MEANING
If an investor wants to create a bunch of money, the stock market presents a lucrative opportunity. By opening a share trading account, you can achieve financial success by trading in the stock market and investing in the right stocks. And typically, when it comes to making money, new investors tend to go after penny stocks.
Some of the small public companies trade their shares at a very low price in the initial stage which might subsequently trade at higher prices are called penny stocks. In the current scenario of stock market of India, a stock whose present value is below ₹10 is labelled as penny stocks. The penny stocks are priced lower with a low market capitalization. Owing to the low market capitalization, penny stocks are not very liquid and thus are infrequently traded. As a result of infrequent trading, lack of liquidity, and small number of shareholders the price of the penny stocks are subject to sudden and high levels of volatility. Nevertheless, the penny stocks can present good trading opportunities if you play your moves right.
In the western markets of the globe, the value of penny stocks are below $1. But this basket also includes the stocks that are traded below $5. Although, trading in penny stocks is highly risky, in certain situations the penny stocks have the potential of turning a small investment into a fortune. For example, if you own 50,000 shares of penny stock with a value of $1, even a single rise of $1 in share price can give you the opportunity of earning $50,000 in a single day. This is not possible in the case of a large stock, because it would require large capital to buy such a large volume of shares.
EMERGENCE OF PENNY STOCKS
The emergence of penny stocks dates back when the stock market came into existence. Unfortunately, there is no solid information about the early history of penny stocks. But fortunately, we know that back in the 1800s and early 1900s, some of the companies offered enormous numbers of shares for a penny per share.
In 1929, there was a Stock Market Crash after which the US federal government realized the need of overhauling the security regulations. This was a great step to eliminate the unbridled speculation around penny stocks. The government thought the speculation surrounding the penny stocks caused the crash in the stock markets in the year 1929. The regulations were the key to avoid low quality, valueless stocks while the stocks from more reputable companies were promoted – at least, that was the idea.
SECURITIES EXCHANGE ACT OF 1934
In the year 1934, the Securities Exchange Act was passed by the US government. This act was established to bring an order to the world of penny stocks. The SEC Act clearly defines the penny stocks as all equity securities that were trading for less than $5 and unlisted on any national stock exchange. But after the stock market crash in 2007-2008, the definition was changed again. A caveat was added in the SEC which said that penny stocks could be traded on US and foreign securities exchanges.
Although, in most situations, the “penny stocks” are defined as the cheap stocks that are sold off of major national stock exchanges; as per the definition defined in the Securities Exchange Act 1934. When a stock is sold off a major national exchange it means that you need to exchange it Over The Counter or OTC. Thus, most penny stocks are available through OTC stock markets.
THINGS TO KNOW ABOUT PENNY STOCKS
Is investing in penny stocks highly risky and is full of danger, unsafe and insecure? The answer to it is “Yes”. Are penny stocks small companies just getting started, or firms that have been overlooked and undervalued by investors, but has the potential to multiply a small investment in a short time frame? Again, the answer to it is “Yes”.
Like the coins have two sides, there are also two sides of penny stock investments. Although, the risks in the penny stock investment are high but certainly the tales of quick riches and photos of fancy cars and big houses that catches the eye of the investors. Despite the risk of losing the investment money, the promise of rewards seems to be more than enough to attract many hopeful investors around the globe to these low-priced shares (for better or worse). However, it is important to have the knowledge about the pros and cons of penny stocks.
▪The big winners of tomorrow
The penny stocks act as a magnet for investors because of the potential of getting quick and rich money. The penny stocks are often still in the “growth” phase, and therefore there is a room for the company’s growth and rise in the stock value. This means that the penny stocks usually carry greater return potential than higher-priced stocks in more established companies. Thus, there is a high probability of doubling or even tripling the initial investment money through penny stocks.
▪︎ The possibility of massive payday
If an investor has ₹20,000 to invest, he has two options. Either he can invest the money buying 5 shares each of ₹4,000 or he can buy 20,000 shares each of ₹1. Now, for instance if the price of penny stock climbs to ₹2 in a day, the investor earns ₹40,000 in a single day. If the stock price collapsed for some unfortunate reasons, the investor would only be out of ₹20,000.
This is one of the greatest advantages that penny stocks have. The cheap price of the penny stocks do not require shelling out a lot of money and it is easy to enter in the stock market.
▪︎ A good option for beginners
Trading in the stock market is risky and requires knowledge. If you are new in the market and just getting started with trading, penny stocks are typically good bets. By trading penny stocks, you will get a higher level of freedom to experiment and thus teaching you the ins and outs of trading.
As you know that generally the price of penny stock is minimal, you do not need to have a lot of capital to start investing in the stock market. The low cost of the penny stocks minimize the risk of losses. All you need to get started is a trading account and some funds.
▪︎ Make a smooth entry in the stock market
When you are dealing with penny stocks, you don’t require very much to get yourself started. Usually, the price movement of penny stocks are mostly speculative and therefore, critical and methodical technical analysis is not needed. Moreover, you don’t require certificates or extensive training in trading with penny stocks. You will require only an internet connection and an online trading account and there I’d absolutely zero entry barriers with penny stocks.
▪︎ The possibility of an empty bank account
You can easily make fast money with the help of penny stocks, but you can lose everything you have invested just as quickly. Penny stocks can have high returns, but the low cost of a penny stock often reflects that the company is unstable. Some of the companies that offer penny stocks put an effort to secure their capital to eliminate the chance of bankruptcy or pay debts.
There might be instances when a company might not be in distress and still have low priced penny stocks. The reason behind this may be the firm is not so well known or well established. There are higher chances that the company will not make it in the market. In addition to that, it is evident that low price indicates lower demand. So, you might not be able to find someone to buy your stock for as much as you paid.
In conclusion, penny stocks are highly risky and definitely not a good option for faint-of-heart investors.
▪ Hard to keep a track
As we all know, the movement of penny stocks is not steady. The reason behind the unsteadiness is that usually penny stocks are traded in small lots among a handful of investors, which exaggerates the price swings. Therefore, the price of stocks can shoot up very rapidly but also drop down swiftly.
Penny stocks are not long-term investments and are not for buy-and-hold investors. The investors who have low risk tolerance should avoid the thoughts of penny stocks. While investing in penny stocks, one should be vigilant and keep a close tab on the stocks and sell when there is a fat profit. If you hold a penny stock for a longer period of time, there are higher chances that the tidy profit will become a dismal loss. Also, as the market of penny stock is relatively thin it is difficult to find a buyer when you want to sell.
▪︎ Beware of frauds and scams
Penny stocks are usually classified as prime targets for fraudulent price manipulation and sham promotions. The penny stocks are typically thinly traded, minimally regulated and unfamiliar to most investors.
For instance, the perpetrators may trade the stock back and forth among themselves to boost up the price level and then sell the shares to other unsuspecting investors to catch a huge dishonest profit. Fraudulent stock promoters typically claim their company is onto some sort of “sure thing” that will generate big rewards with negligible risk.
HOW TO PICK UP WINNING PENNY STOCKS
To start trading the penny stocks, you don’t need a huge bankroll. Notably, you could trade with confidence because you don’t have to fear losing much money as compared with other reputable companies to start trading.
You may know that penny stocks can become a bit notorious and in terms of making a profit margin it can be difficult. In some of the infelicitous situations, the investors fall into value traps while selecting penny stocks as they trade at a lower price.
But there is also a fact that there are many penny stocks which made their way to multi baggers and have strong fundamentals. So, how should an investor select the best penny stocks for their portfolio? Below are some of the points that can help you. Read on!
- Are penny stocks right for you?
The first ever thing that you need to decide is if you are able to absorb the high levels risks associated with penny stocks. If you don’t have the courage and find the penny stocks too risky regardless of the promising potential of returns, it would be prudent to walk away.
- Understand the Market
Before you start trading with penny stocks, you need to possess a good knowledge of the stock market. The movement of the stock market flows with numerous reasons like a war, election, natural disaster, change in government policies, introduction of new technology, and many more.
The firm’s that have penny stocks are not fundamentally strong and thus they have a reaction to minor events too. Therefore, it is always suggested to have a good understanding of the stock market to pick up the right penny stocks.
- Check, Research & Monitor
In the stock market, there is a huge chunk of stocks to look for. Among such a large group of stocks, you need a strategy to identify the right penny stock. First of all, create a broad set of criteria that can help you identify the industry, sector, etc. This will help you to keep a hand on the stocks that you want. Then, you need to fine-tune the criteria to arrive at the final list.
For example, you start looking at the medical sector since your research says that there are many exciting startups and small companies in the sector that have a bright future. After that, you need to weed out names and try to find the few who have the best chance to turn into multi-baggers.
- Do Some Paper Trading (Practice)
Paper trading is creating a hypothetical portfolio of stocks (without real money) and doing some practice trading as if you would do in the real market. The practice sessions will help you get prepared before you enter the market and start making investments.
To start paper trading, you can maintain an excel sheet with the lists of penny stocks you would buy today if you were to start trading. Monitor the penny stocks and when you decide to sell, make a sale entry on the sheet. This can help you fine-tune your process and choose the right stocks.
- Have a good understanding
We often tend to associate the penny stocks with ‘affordable’. It is a human tendency to buy a large quantity at the same price. Most of the investors think that the price is low, there is a huge opportunity to make large profits. In addition, if the stocks turn into multi-bagger, one can multiply the cost. This can be a counterproductive approach. But before investing it is a sagacious choice to assess the value of stock based on the company’s performance. It can be done by various ways like:
▪︎ Book value per share
Divide the net worth of the company by the total number of outstanding shares. This will give you an idea of the value of share which will be based on the company’s performance.
▪︎ P/E ratio
Divide the stock price by the company’s earnings per share. This will give you an idea if the company is overvalued or undervalued. This is important for penny stocks since there can be times when a stock price of Rs.2 will be overvalued if the company is not doing well and probably heading towards closure.
▪︎ You can also look at the dividend discount model, CCI pricing model, and analyze the company’s free cash flow to assess the intrinsic value of the share.
The assessment of the price of the stock is necessary because it indicates the demand and supply. This can create huge waves in the stock market.
- Caution: Constant Dilution
Let us understand this by a simple example. A company has issued one lakh shares to one lakh shareholders. Hence, each shareholder has 1% share in the company. Now, if the company wants to attract good talent and raise capital, it will issue new shares. Hence, it issues new one lakh shares to new one lakh new shareholders. This will bring down each shareholder’s share in the company to 0.5% and also cause the share price to drop.
Henceforth, it is advisable to avoid the companies with constant change of share structure.
- Avoid Speculation
We all know that penny stocks are like a magnet who pulls the investors. However, you should keep each footstep very carefully.
It is always advisable to assess the fundamentals of the company before investing. Look at factors like the business structure of the company, cash flow management, financial records, and other fundamental factors to understand if the company has the capacity to offer you huge returns.
There is a term ‘Gold Rush Approach’ in the stock market world. When a company promises to give 5X or 10X returns, people tend to gravitate towards it resulting in a buying spree and ultimately there is a rise in the stock price. What investors forget is that if the company is not fundamentally strong, then this rally can nosedive overnight!
THUMB RULES FOR INVESTMENT IN PENNY STOCKS
Despite all the high-level risks, investors are still making investments in the penny stocks. The one and only reason behind it is the fantastic returns that some stocks have delivered in the past few years. If you also want to consider trading penny stocks, there are some thumb rules that will eliminate the risks associated with losses.
- Do not rush!
It is totally not advisable to lean too much on these risky investments. The penny stocks should not have more than 10% of your total equity portfolio. To make this clear, suppose you have ₹20 lakh in the investment portfolio and 30% (₹6 lakh) of it is in the stocks. So, the maximum you should put in penny stocks is ₹60,000. You should not invest when you cannot afford to lose.
- Invest only in 2-3 stocks
The system of diversification doesn’t apply in the penny stock market. A sagacious choice would not be picking up a large number of stocks but investing in a handful of scrips. Spreading your hard-earned money across low-priced shares will not bring you meaningful returns for them. For instance, you have invested ₹3,000 in a stock and the return is 25%, it is merely ₹750. Moreover, it is easy to monitor 2 or 3 stocks rather than 10 or 20 stocks.
- Don’t invest and forget!
The investment in penny stocks should be seen with a lens of short term investment rather than long term investment. Usually, people have a thought that if they wait over a year, they will get higher returns without tax. But, what they fail to understand is that the penny stock fluctuates a lot and they might fall. Therefore, a target should be set and exit when achieved.
- Don’t believe anyone
You will get a lot of advice and information from other investors in online portals. Don’t believe a single word. In the real scenario, everybody is searching for some fools who will be ready to pay a lot of money for the junk in their portfolio. Also, the management usually paints a rosy picture which is not true. Henceforth, use your brain and never trust anyone in this segment.
- Run after high values
Some of the stocks are traded very thinly. For example, the average daily volume of Titian Securities is 3 months per month. So, definitely you won’t be able to exit the stock so easily. You should always buy shares from companies that have a high liquidity. It is not advisable to look over one day trading but monthly average.
- Don’t try to average your purchases
Suppose, you have bought a share at ₹6. But, now that same share is trading at ₹3. Be careful and don’t try to average your purchases by buying more shares because of the low price. You may end up digging a bigger hole and large losses can incur. Rather than getting anchored to a price and be ready to book losses if an investment goes wrong, you should focus on averaging the stock price by selling some portion of the shares and when the price rises, it will be sagacious to sell the shares and not buy more.
- Never let success change your strategy
If you have started trading stocks and making huge gains, you may tend to get carried away by the fat profits. Building overconfidence can make you commit mistakes. Henceforth, you need to keep the above 6 thumb rules if you don’t want to get confused in this stock market.
PENNY STOCKS THAT HAVE HIGH RETURNS IN 2021
India has been trading on a higher note. In the year 2021, the benchmark index, BSE Sensex has been rushing upwards to 6% in the month February. During this period, while blue chips were surging, the low-priced penny stocks were also rising upwards.
At least, 6 low priced stocks have seen a rise of at least 40% in 2021.
- Tata Teleservices (Maharashtra) Ltd: In 2021, the stock has risen 177.29% to Rs 22.10, as on February 5 from Rs 7.97 as on December 31, 2020.
- Digispice Technologies Ltd: In 2021, the stock has surged 104.81% to Rs 47.70, as on February 5 from Rs 23.29 as on December 31, 2020.
- GTL Infrastructure Ltd: In 2021, the stock has advanced 56.94% to Rs 1.13, as on February 5 from Rs 0.72 as on December 31, 2020.
- Centrum Capital Ltd: In 2021, the stock has increased 44.51% to Rs 24.35, as on February 5 from Rs 16.85 as on December 31, 2020.
- Trident Ltd: In 2021, the stock has gained 42.91% to Rs 14.12 , as on February 5 from Rs 9.88 as on December 31, 2020.
- Arshiya Ltd: In 2021, the stock has gained 40.00% to Rs 27.30, as on February 5 from Rs 19.50 as on December 31, 2020.
THE BOTTOM LINE
Penny stocks are capacitated with good investment opportunities for a large group of people, but certainly they always carry risks, just like all kinds of equity. The flow of price of stocks is generally unprecedented most of the time, thereby increasing the risk factor. However, the risk level can be mitigated to a certain extent if you make sure to choose the right penny stock before investing.
The simple key to find an authentic and wealth-creating penny stock is conducting extensive fundamental and technical research. One has to look all factors in deciding what could be top 10 penny stocks list to buy today, or top 5 penny stocks list to buy today because its keep changing with time and situation and there are so many factors involve in determining the same. So, if you want to start trading and invest in penny stocks, it is prudent to refrain yourself from putting too much emphasis on others’ opinions or predictions. It is advisable to always ensure that you do your own due diligence on the stocks. Putting slow steps with sagacious decisions will make the experience of trading beautiful and profitable.