Penny Stocks – All about it
A penny stock generally refers to the stock of a small company that trades for less than $ 5 a share. Although some penny stocks are traded on major stock exchanges, such as the New York Stock Exchange (NYSE), most are traded via over-the-counter (OTC) transactions via the OTC electronic bulletin board (OTCBB) or privately through the OTC Markets Group. For OTC transactions there is no trading floor. All offers are also made electronically.
Penny Stock Example
Most penny stocks are not traded on major stock exchanges. However, there are some large companies based on market capitalization that trade below $ 5 a share on major exchanges such as Nasdaq.
An example of a one-cent stock listed on Nasdaq is Catalyst Pharmaceuticals Inc. (CPRX). It is a small biopharmaceutical company located in Coral Gables, Florida. Since Jan November 2021, the share price is $ 3.55 per share. Over the past 12 months, the stock has fluctuated between $ 2 and $ 5. On August 10, 2020, the stock closed at $ 4.26; however, the next day the price dropped to $ 3.34, a decrease of almost 22%.
Although substantial profits can be made by trading penny stocks, there is an equal or greater risk of losing a significant portion of an investment in a short period of time.
Features of Penny Stocks
There are 4 main features that are listed below:
- High returns: These stocks offer much higher returns compared to other forms of security. Since these stocks are issued by small and micro-cap companies, they have enormous growth potential. As a result, penny stocks are risky as they are highly sensitive to market fluctuations.
- Illiquid: Penny shares in India are inherently illiquid as the companies that issue them are relatively unpopular. It becomes difficult to find people who are willing to buy these stocks and who offer little help in an emergency.
- Low cost: In India, penny stocks are usually lower than 10 rupees. Therefore, with a small investment, you can buy a significant number of units of shares from the penny stock list.
- Unpredictable pricing: Penny stocks may not be priced reasonably during the sale. This can result in a lower or no profit margin. Similarly, these stocks could also be priced well above their cost; hence a considerable profit.
Penny Stocks Price Fluctuations
Penny shares in the market are often growing businesses with limited cash and resources. Since they are primarily small companies, penny stocks are best for investors with a high tolerance for risk.
Penny stocks tend to be more volatile, leading to higher return potential and therefore higher inherent risk. Investors can lose all or more of their investment in penny stocks when buying on margin, which means that the investor has borrowed money from a bank or broker to buy the stocks.
As we know, there is a higher level of risk associated with investing in penny stocks. So that is why investors should take special precautions. For example, before entering a trade, an investor should have placed a stop-loss order and know what price level to leave if the market moves in the desired direction. Stoploss orders establish a price limit that, when reached, triggers an automatic sale of the securities.
While penny stocks can produce explosive returns, it’s important to have realistic expectations and understand that penny stocks are high-risk low-volume investments.
Why should you invest in it?
This must be the question revolving in your mind. The question must be that what makes penny stocks worth investing in. So I guess the following reasons must be enough for you to make up your mind.
Penny stocks can be seen as last-minute security. Businesses that spend them can grow into a large organization and generate above-average returns in the first few years or earn points in the first few years, resulting in huge losses.
Despite these accusations, penny stocks must be added to your portfolio. Here are the reasons why it was-
Some of these stocks have the potential to move to multi-excavators. This means stocks that yield a multiple of the investment amount. When particular security brings twice your investment, it is called a double bagger, and when it returns ten times your investment, it is considered a ten-bagger.
Inclusion in your portfolio could exponentially increase your performance outlook, outperforming large and medium funds. However, do a thorough investigation of the penny stock list to assess which stocks have the potential to be multiple baggers.
Mr. A invested Rs. 5,000 in one-cent stock of G Ltd., an IT startup. Each unit costs 5 rupees. The company was doing well and its penny stock value was 50 rupees at the end of the 18-19 fiscal years. Then Mr. A sold the 1,000 shares of him for Rs 50,000, which made ten times the return. This action is considered a ten-bagger.
Investing in these stocks is comparatively cheaper. Therefore, you can invest in them without losing a significant part of your investment finances. If you allocate a small part of your portfolio to buying the best penny stocks of 2019 in India, you still have scope to invest in other, safer investment options, while at the same time significantly reducing the risk factor involved.
Risks associated with investing in penny stocks
Every investment comes with lots of risks. You should definitely be very careful while investing your money in something. So the risks associated with penny stocks are mentioned below:
Given the scale at which the companies offering these stocks operate, they are vulnerable to enormous risks. These stocks are highly dependent on market conditions to increase their value.
Aside from the basic dangers associated with market-linked securities, there are other types of risks associated with penny stocks. These are:
- Limited information: Since companies issuing penny stocks are startups, there is a lack of information about their financial health, past performance, growth prospects, etc. People may end up only half investing in them. So before investing, do your research on the penny stocks list in India.
- Scams: In international financial history, penny stock scams are very common. One of those popular methods is “pump and dump.” Corporations and scammers buy significant amounts of penny stocks, creating value inflation that attracts other investors to follow the hype.
However, once enough buyers have invested in such shares, those companies and scammers will sell their shares. This results in an immediate depreciation of the value, followed by losses on the part of the conscientious investor when trying to sell it.
When looking at the penny stocks listing in India, be sure to conduct a thorough investigation of the companies in question. Gather information about your financial health, stability, growth prospects, and any history of your business operations.
Companies with integrity and potential provide clients with sufficient insight into the above factors to make informed decisions.