What is penny stock?
Those shares of small cap or micro cap companies which are available to buy in the stock market at a low price are called penny stocks. Both risk and return are very high in such low priced stocks.
Most of the new investors are attracted towards such stocks because they want to make quick money.
But the truth is that companies with penny stocks are either ruined or their business is over.
But now the question comes that why do people invest their money in penny stocks, is it only because of the low price of the shares or something else?
And what sets people apart from those who buy penny stocks to get rich in no time? Is it just their luck or do they know some such things you don't know…
Reasons to Invest in Penny Stocks:
There are many reasons to invest in penny stocks that appeal to every investor.
Reasons for getting more shares at a lower price:
Most small investors are attracted to the price of penny stocks. You know that you can buy penny stock even for just 1 rupee, so even if you have 100 rupees then you will get 100 shares of that company. Whereas if you buy shares of a strong company such as TCS, then you will get only one share for more than Rs 3000. By buying more shares at such a low price, people consider themselves to be a sensible investor, whereas the opposite happens.
In the pursuit of higher returns:
People think that if a share is getting at a price as low as Rs 2 only, then it will not take much time for its price to become Rs 4 instead of Rs 4000 for a share of Rs 2000. If seen, people compare the shares of these penny stocks and large companies.
But if you look at history, even if you add up the returns of all the companies in penny stocks, they still will not be able to beat the returns of half the companies of Nifty 50 index.
Reasons for growth:
The chances of chances are high in low-priced stocks because those companies are very small or their business is being done on a small scale which can be done on a large scale in future. That's why people are in a rush to buy the next Titan or the next HDFC Bank stock and that's why they keep looking for good penny stocks. Because if you had invested in the shares of HDFC Bank or any big company at a time when that company was a penny stock or if the size and market capitalization of the company was very less, then your money would have multiplied and gave you multibagger returns.
All these three factors attract not only small retail investors but also large institutional investors who expect multibagger returns by investing a substantial amount of money in penny stocks.
5 reasons why penny stocks are risky every investor should know:
1. Lack of information
If you search for information about any penny share on the internet, then you will find very little information about its business and management.
Such shares come in the news only when the company has announced a big project, the stock starts rising suddenly.
You will see such a small stock in every small stock that you will get very little information while researching about it. And this is why it becomes a bit difficult to trust penny stocks.
2. Low Liquidity
Liquidity refers to the ease with which a stock can be bought and sold. If the liquidity is high then you can easily buy and sell any stock.
The highest liquidity comes from bluechip companies (Nifty 50 companies because there are many investors who have invested their money in them.
Whereas, on the contrary, the liquidity of penny stocks is very less because most people do not know about them, that is why they buy a cheap stock but are not able to sell it because upper circuit or lower circuit keeps happening in it and this Thus the money of a common investor gets stuck.
3. High volatility
Volatility means how much the price of a stock fluctuates up and down.
If the chart of a stock moves very smoothly then it is very less volatile (for example: Pidilite or Wipro) and the same if a stock is moving up and down too much.
So that means they are quite volatile which are mostly penny stocks because the number of people who buy and sell them are very few.
4. Increase or decrease the price by the operator
It is very easy to operate the stock of a company smaller than anyone.
Operating the stock means that if any big investor puts a lot of money in a penny stock at once, then the price of the stock will suddenly increase and in such a situation people will also start getting attracted towards it.
Many times such stocks are promoted unnecessarily, such as by running advertisements on YouTube or by paying money to a website that writes news articles.
But if you are a savvy investor then you should not fall into their trap and you can do this only if you do good research on the company.
5. To be affected the most in a bullish or a downtrend.
You will always see that whenever there is a bull run or bull run in the stock market, most penny stocks only run and after a time they start getting upper circuit which makes them difficult to buy.
On the contrary, when there is a bear run in the market, then most penny stocks fall or some small companies are completely ruined whose business has no power.
