Today’s topic of discussion is Penny Stocks, a much-talked-about subject in the investment world, particularly among new investors.
What is a penny stock?
The word “penny” refers to something available at a very low price. In Britain, one-hundredth of a pound is called a penny.
Penny stocks are types of shares that are very low in price. In India, shares with a market value generally below ₹10 are referred to as penny stocks.
Penny stocks are typically issued by new or small companies.
What are the benefits of penny stocks?
Opportunity to Invest at Low Prices:
Penny stocks typically have a low price point, allowing investors to acquire a larger number of shares with a modest investment. For example, an investment of ₹5,000 could secure 5,000 shares, each valued at ₹1.
High-Profit Potential:
Small companies often grow into large corporations over time, which can cause the value of penny stocks to rise rapidly.
Growth of Startup Companies:
Penny stocks usually come from small and newer companies that might have a chance to grow a lot in the future.
Attractive to New Investors:
Due to their low prices, penny stocks attract new investors who are just starting their investment journey.
Risks of Penny Stocks
- High Volatility:
The prices of penny stocks can rise or fall significantly. This occurs due to irregularities in market transactions. - Low Liquidity:
Penny stocks usually have a really low trading volume. This means that if you buy some shares, it can be tough to sell them later because there might not be many buyers around. - Low Market Capitalization:
The companies that deal with penny stocks often have a small market value, which makes them pretty risky to invest in. - Large Gaps in Pricing:
The ask price (price at which sellers want to sell) and the bid price (price at which buyers want to buy) of penny stocks often have significant differences, making transactions nearly impossible. - Lack of Reliability:
Penny stocks are often seen as unreliable and depend a lot on guessing what might happen next.
How can you understand that this stock is penny stock?
- The trading volume is really low.
- The share prices are super low.
- The company’s market value is quite small.
- There are big ups and downs in share prices.
- The performance is not steady at all.
If you want to invest even with so much risk then,
What are the things that you have to keep in your mind?
Keep Your Investment Small:
Try not to put too much money into penny stocks. It’s best to keep your investment in these stocks to no more than 10% of your total portfolio.
Get Ready for Possible Losses:
When you invest in penny stocks, only use money that you can afford to lose.
Think Short-Term:
Penny stocks work best for quick investments. If you make a profit, consider selling some of your shares right away.
Check Company Details:
Before you buy shares in a company, make sure to look closely at its current finances and how it might grow in the future.
Conclusion
While penny stocks can offer significant returns, they come with considerable risks. Many new investors are attracted to these low-priced shares, but it’s essential to perform comprehensive research and strategize before making any investments.