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Risks and Rewards of Penny Stocks

Everyone today is looking for investment opportunities. Some are investing in safe bets like fixed deposits and gold, there are others who are investing in equity either via mutual funds or direct investment in stocks. In today’s post, I’ll share some risks and rewards of Penny stocks.

Penny stocks are stocks that trade at a very low price, have a very low market capitalization, are generally illiquid, and are typically listed on a smaller exchange. In the Indian stock market, generally, penny stocks may trade for less than Rs 10.

Due to their high risk, little liquidity, limited shareholder base, large bid-ask spreads, and limited information availability, these stocks are very speculative in nature.

What Are Penny Stocks?

As the name implies, penny stocks are shares that are traded on the stock exchange for extremely low prices. Although there is no specific definition of how low the price has to be for a stock to be called a penny stock, it can be anywhere around Rs 10, or even Rs 20 or 30. 

Risks and Rewards of Penny Stocks

Most of the time, they can be bought in large quantities for a low price and with very little capital. The best penny stocks are those that have the potential to provide multi-bagger returns, which is why they are also frequently referred to as multibagger penny stocks.

Features Of Penny Stocks

The following is a list of a few features of penny stocks:

  1. High returns: When compared to other types of securities, these stocks offer much higher returns. These shares offer a great deal of growth potential because they are issued by small and micro-cap companies. Therefore, penny stocks are risky due to their sensitivity to market fluctuations. Investors can explore the share price of such stocks, like trident share price and other details at Kuvera. 
  2. Illiquid: Given that the companies issuing penny stocks are relatively unpopular, penny stocks in India are illiquid in nature. It becomes difficult to find investors who are willing to purchase these stocks, limiting their utility during times of emergency.
  3. Low cost: In India, penny stocks are typically less than Rs. 10 in price. As a result, with a modest investment, investors might buy a sizeable number of stock units from the penny stock list. 
  4. Unpredictable pricing: Penny stocks may not attract enough pricing during the sale. It could lead to a smaller or nonexistent profit margin. Similarly, these stocks could achieve a price substantially greater than their cost, resulting in a substantial profit.
Penny Stocks - Risks and Rewards. Courtesy: TheHansIndia
Penny Stocks – Risks and Rewards. Courtesy: TheHansIndia

Risks Associated With Penny Stocks

Given the scale at which the companies offering such stocks operate, they are prone to huge risks. These stocks depend substantially on market conditions for value growth. In addition to the usual risks that come with any market-linked security, penny stocks have their own unique risks. These are as follows:

  1. Limited information: Given that the companies issuing penny stocks are sometimes new, there is a lack of information on their financial stability, prior performance, growth potential, etc. Therefore, before buying, do extensive research on the list of penny stocks in India.
  1. Scams: Scams using penny stocks are prevalent in global financial history. “Pump and Dump” is one such common strategy. Companies and scammers buy a huge number of penny stocks, inflating their value and luring additional investors into the hype. But as soon as enough investors buy these stocks, scammers and dishonest companies dump their stock. As a result, its value immediately decreases, and when diligent investors try to sell it, they suffer losses.

Multibagger Stocks

Multibagger stocks are equity shares of a company that generates returns that are several times higher than its associated cost of acquisition. Multibaggers are stocks that offer returns that are multiples of their initial investment. These are essentially inexpensive stocks with solid fundamentals that make excellent investment options. Multibagger stock companies have businesses that are scalable within a short span of time and have solid corporate governance.

Penny Stocks That Became Multibagger Stocks:

Some of the stocks that became multi-baggers are:

  1. Eros International Media
  2. Shanti Educational Initiatives
  3. Cressanda Solutions
  4. Swiss Military Consumer Goods
  5. MPS Infotecnics

Frequently Asked Questions (FAQs)

Why Should You Invest in Penny Stocks?

Penny stocks might be viewed as a risky investment. Companies that issue them could develop into big companies and produce above-average returns, or they could fail in their early years and suffer significant losses. Some of the reasons to invest are: 

Multibagger: These stocks could develop into multi-baggers in some cases. It refers to stocks that pay out multiples of the investment. Frequently, particular security is referred to as a “double-bagger” if it returns double the amount invested, and a “ten-bagger” if it returns ten times the amount invested. To determine which stocks could become multi-baggers, do extensive research on the penny stock list.

Inexpensive: The cost of investing in these stocks is relatively lower. As a result, you can invest in them without worrying about losing a sizable chunk of your investment money. You could still choose to put your money into other, safer investments, and putting a small amount of your portfolio into the top penny stocks in India would greatly reduce the risk.

I’ve spoken a lot about financial literacy and investments on the blog and thought that talking about penny stocks would be helpful. This is a very basic outline of what penny stocks are and the risks and rewards of penny stocks. Let me know your thoughts on this blog post. Drop them in the comments below, tweet to me at @Atulmaharaj, DM on Instagram or Get In Touch.

Disclaimer: “I’m not a financial expert and whatever I’ve shared here is based on my limited understanding and experience of using the mentioned financial instruments. Please consult your financial advisor before investing.”

About Atulmaharaj

A seasoned blogger and a content marketer for close to a decade now. I write about Food, Technology, Lifestyle, Travel, and Finance related posts. Blogging brings me joy and the best part is I get to read and e-meet so many amazing bloggers! PS: I'm also the founder for Socialmaharaj.com :) Favorite Quote: "Traveling is like reading a book, one who hasn't traveled, hasn't turned a page.

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