Daily Stock Market Reports

Money Talks: To Do Or Not To Do – Should You Buy Penny Stocks? All You Need To Know


New Delhi: Trading in penny stocks is something that is usually never recommended by veteran investors who carefully analyses a company fundamentally before investing in it. Just like there is always a disclaimer that stock prices are subject to market risks, penny stock prices are even more volatile. In a terrible storm, shrubs with fainter roots are more prone to be wiped away than big trees that have roots spread into the deepest regions of the earth. Trading in a penny stock is like an intelligent gamble, sometimes you make a huge profit out it, sometimes it’d would end up a big disappointment.Also Read – Sensex, Nifty End In Red For 5th Straight Trading Session. At 57K & 17K, Indices Hover Below Last Close

WHAT ARE PENNY STOCKS?

There is no fixed definition for a penny stock. Even the market regulator hasn’t given one. So, going by the conventional standards, in Rupee context, a penny stock is generally a company’s share that’s being traded under Rs 10. Also Read – OPENING BELL: Markets Open In Green. Sensex Up By 300 Points, Nifty Surges Past 17.1K Mark

A backbencher kid is one of the most interesting analogies that can be drawn to a penny stock. Not many teachers expect that a backbencher kid, who has nothing much to display as prowess, would turn out to be miraculously successful in life. Same goes with penny stocks. They seem to have very low potential for growth, and due to some significant changes that may happen to the company either externally or internally, the share price gets shot up to exponential levels. Also Read – CLOSING BELL: Sensex Tanks 950 Points, Nifty Inches Close To 3 Month Low. Check Top Gainers & Losers

Tata Teleservices (Maharashtra) Limited Share Price Movement (Courtesy: TradingView)

The above chart shows the performance of Tata Teleservices (Maharashtra) Limited or TTML share price. Two years back, on September 25, 2020, the share price of TTML stood at Rs 2.95. From there, the share price rose to Rs 290.15 on January 11, 2022. A person who bought 1,000 TTML shares at a total of Rs 2,950 back when the share price was Rs 2.95, would’ve been able to sell the same at Rs 290,150 a year and a half later on January 11, 2022 when the stock reached its highest point.

IF THIS IS THE CASE, WHY CAN’T WE BUY A LOT OF PENNY STOCKS AND SEE WHICH ONE GOES UP?

Even though in the above example, we saw a humongous return in a span of a year and half, that’s not the case with all the penny stocks in the market. If you randomly pickup 10 penny stocks and invest a good amount in each one of them expecting good returns for a few, there are high chances of you losing out money on most of the stocks, if not all. And that would be a terrible disappointment.

HOW TO CHOOSE YOUR PENNY STOCK?

Penny stocks can be broadly divided into price-wise penny stocks and value-wise penny stocks. While price-wise penny stock are the ones which are generally traded at a significantly low price, value-wise penny stocks are the ones that have a very less market capitalisation. In general, it’s advised to go for penny stocks that meet both the conditions — that is, price-wise and market-wise they should be ‘penny’.

The business model of the company should be analysed. When you do that, you should not stick to that particular company alone, you should be checking if the business model is in line with industry standards and overall economic needs.

The financial ratios such as Return on Equity (ROE), Return on Capital Employed (ROCE), growth in sales and profit, promoter pledge, et cetera should be taken into consideration.

A management analysis of the company should be done. Also, the vision, mission and objective of the company should be looked at.

Another thing that should be carefully observed is the shareholding pattern of the company. If the promoters of the company don’t hold a lot of shares, there are high chances of them being lethargic.

Always follow the basic rule of trading — Never put all the eggs in one basket. If, for instance, you’re planning to invest Rs 1000 in penny stocks, it’s always advisable to divide the investment into at least 10 or more penny stocks that are carefully chosen after detailed analysis.

Experts have recommended that technical analysis is not really the thing you should be doing while choosing a penny stock. Even though fundamental analysis takes time and effort, it’s the usually the recommended way to choose a penny stock. Also, it’s advised that penny stocks should be bought when the market is on an upward trend and not a downward one.

IS HOLDING PENNY STOCK(S) GOOD FOR YOU?

There is never a definite answer to this. Market experts vouch for fundamentally strong stocks, they guarantee that those shares will give good returns in the long run, but they don’t usually give the same for guarantee for penny stocks.

If you ever heard someone saying any listed stock was once a penny stock, that’s completely false information.

There can be people who suggest you to buy several shares of a stock worth Re 1 saying that, definitely it will go up to Rs 2 because, in absolute terms, there is hardly any difference between both the shares. But we should be considering the returns in terms of percentage terms rather than absolute terms. The fact that there’s a 100 per cent difference between Re 1 and Rs 2 should come into your mind before you jump the gun.

One would say there’s no harm in investing a very small amount of your total investments in penny stocks that you’re confident about. Ideally, this amount should not exceed the amount you spend for a party night or a dinner. Sometimes all you lose is a fraction that you’d probably spent elsewhere, but sometimes you stand a good chance to reap huge profits too! So, good luck with your investment journey.





Read More: Money Talks: To Do Or Not To Do – Should You Buy Penny Stocks? All You Need To Know

You might also like