What are Penny Stocks?

What are Penny Stocks?

'Penny stocks' we all have heard this term, but not sure of what they are. They aren't the same as stocks that are "penny" stock trading.

What are penny stocks? Are they good to invest in? The terms "stock", "stock trading", and "stock market" are often used interchangeably. This is because all of them refer to individual stocks or stocks in general. Penny stocks can be considered viable investments in certain circumstances. 

Understanding Penny Stocks in India

Penny stocks in India are the stocks that are traded at a low price and volume. The minimum price of penny stocks in India is Rs. 0.01. Penny stocks in India are traded on the NSE and the BSE.

Penny stocks, because of their low price, are used to get trading experience for new traders. These stocks are very low priced, and it is almost risk-free to try your luck with penny stock trading.

Penny stocks are quite popular with small investors because of their potential for huge gains. The gains may be in the range of 300% to 500% or even higher. Even if you have a small investment of Rs 100/-, you can still gain up to Rs 500/- profit.

In India, these can be defined as shares of companies whose market capitalisation value is less than Rs. 10 Crore. These stocks have a huge potential for investors if they have access to the correct information and support, but there are several risks involved.

How to spot a potential penny stock?

Penny stocks are considered shares of low value ($0.01/share) traded on over-the-counter bulletin boards. Unlike regular trading, investors do not buy these securities from the company itself but brokers or dealers. These dealers make a profit by marking up the price of the stock they are selling to you. Thus, they are also known as 'marketers'.

Penny stocks are generally quoted with two different prices – bid price and ask price. The bid price is the price at which a dealer is willing to buy the security from you, while the asking price is when a dealer will sell you that security. The difference between these prices is called the spread, and it varies with different penny stocks.

The spread indicates how expensive or cheap a penny stock is being traded. The wider the spread, the more expensive it is for investors to buy them, which might translate into higher risks for investors who hope to gain from price appreciation of these securities.

Because of the risk involved with penny stocks, some investors don't think it's worth buying shares in them. Others argue they're fine if you know what you're doing and have the time to monitor your investments carefully.

There's no sure way to tell which penny stocks will become big winners and which ones will go bust, but there are some signs that might help you spot a potential winner or loser.

The best way to identify a potential penny stock in India is to research the company and its current status. You should also learn about the trends in the industry and how they affect this company specifically.

Finally, you should look at what companies have done in the past that were successful with penny stocks and mimic their methods if possible. This is not an easy task, but it can pay off big time if done correctly.

How to Trade Penny Stocks?

You will need a penny stockbroker who will get you started on trading penny shares in India so that you get the hang of the process of selling them.

To start with, you need to register with a broker through an online brokerage platform. This can be done from anywhere around the world via phone or email. Once registered, you will need to deliver some documents like:

Passport copy; driver's license; and proof of address and identity (i.e., PAN card). You must also deposit some initial amount with the broker to get started.

The first step is to determine whether the business has to be sold or not. If the company has turned into a profitable business, it can be sold at a reasonable price. The second step is to know the right time to sell the stock.

Penny stock trading is not suited for everyone. If you trade penny stocks, you should know:

1) Penny Stocks Have High Price Volatility: Penny stocks generally have higher price volatility than blue-chip stocks. This means that the prices of penny stocks may fluctuate substantially over a relatively shorter period than other securities such as blue-chip stocks. Price volatility is a risk factor that may cause significant losses if the investor wishes to trade (buy or sell) such securities over a shorter period or without proper research.

2) Lack of Liquidity: Penny Stock trading in India is dominated by retail investors through small savings schemes. Therefore there is a limited number of buyers and sellers at any given point in time. Lack of adequate liquidity reduces the ability to buy/sell securities quickly at reasonable prices, which may make it difficult for an investor to achieve fair market value for his shares held in his Demat account or desired exit price

Characteristics of penny stocks

The price of penny stock can be more volatile than other shares. There is no assurance that they will give good returns on investment. The value of penny stocks may go down without any warning. If you want to invest in penny stocks, then follow the rule of "Don't put all eggs in one basket".

Penny stocks are characterised by high volatility in prices and do not have any formal listing on the exchange. Penny stocks usually carry high risks when it comes to investment, especially when trading them online.

Penny stock trading is not for everyone. It is risky, so only invest what you can afford to lose. Even if your research indicates that a particular penny stock will rise in price, there's no guarantee that it will.

Here are some characteristics of Penny Stocks:

1. Low trading volume
2. Unpredictable performance
3. Small market capitalisation
4. Speculative nature
5. Smaller company
6. Low price
7. Volatile price swings
8. High-risk factor

Wrapping Up

Penny stocks are low priced shares of companies that are not well established. Penny stock trading is an activity that involves selling and buying small company stocks. These stocks are traded by smaller volume than the market capitalisation of the stocks. Penny stock prices do not always follow the trends of larger companies.