What do penny stock mean? Are they worthwhile investments? Stock, stock trading, and stock market are all phrases that are sometimes used interchangeably. This is since they all refer to specific equities or stocks in general. In some cases, penny stocks might be considered legitimate investments.
What is Penny Stock?
Penny stocks are illiquid, trade at a cheap price, and are usually listed on a smaller exchange. The Indian stock market has penny stocks with prices as low as Rs 10. Because of their lack of liquidity, small number of shareholders, wide bid-ask spreads, and restricted disclosure of information, these stocks are regarded very hazardous.
Penny stock investing can produce large returns in a short period of time, but it also has the potential to wipe out an investor’s whole investment due to its high-risk high return nature. As a result, it’s critical to pick penny stocks with prudence and after thoroughly researching the company’s fundamentals.
Features of Penny Stock
#1 – Low Pricing
In India, penny stocks often trade for less than Rs10. As a result, an investor can buy many stock units for a small investment.
#2 – Low volume equals less liquidity
Many penny stocks trade at low volume, which means that if an investor wants to sell and exit the investment, there may be no bidders. This indicates that the equities are typically illiquid.
#3 – Wide bid-ask spread
In penny stocks, the bid-ask spread is quite wide, making it extremely difficult to sell one’s shares at the desired price.
#4 – High Risk, High Return
When compared to other types of securities, these equities offer much larger returns. Small and micro-cap enterprises issue such shares, which have enormous growth potential. As a result, penny stocks are dangerous due to their rapid reaction to market swings.
#5 – Unpredictable Pricing
During a sale, penny stocks may not attract enough pricing. It could result in a loss-making investment or a poor profit. Similarly, these stocks may fetch a price that is substantially greater than the purchase price, resulting in a huge profit.
Reason why penny stocks are called Penny Stocks
Penny stocks trade at such low rates for a reason: most traders buying penny stocks don’t care about them and want to get out as soon as possible once they’ve made a profit. In India, penny stocks sometimes violate exchange restrictions. They don’t even report in a straightforward manner.
They only move when there is some news or a comeback story about penny stocks. As a result of the speculation, trading volumes increase, and prices rise. However, only a small percentage of ideas prove to be accurate or strong on a fundamental level. Any unfavourable news sends the price plummeting.
How to Invest in Penny Stocks
You’ll need a penny stockbroker to help you get started trading penny stocks in India so that you can understand how to sell them.
To begin, you must first create an account with a broker via an online brokerage platform. This can be done via phone or email from anywhere in the world. After you’ve enrolled, you’ll need to submit the following documents:
Copy of passport, driver’s licence, and evidence of identity and address (i.e., PAN card). To get started, you must also make an initial deposit with the broker.
The first stage is to decide whether the company needs to be sold. If the company has proven to be profitable, it can be sold for a reasonable price. The next stage is to determine when the best moment is to sell the shares.
Trading penny stocks is not for everyone. If you trade penny stocks, you should be aware of the following:
#1 – Penny Stocks Have a Higher Price Volatility
Penny stocks are more volatile than blue-chip stocks. This means that penny stock prices can vary far more quickly than those of other assets like blue-chip companies. Price volatility is a risk element that can result in big losses if an investor trades (buys or sells) securities for a shorter length of time or without conducting adequate research.
#2 – Lack of liquidity
Retail investors in India dominate penny stock trading through tiny savings plans. As a result, there are only a limited number of buyers and sellers at any time. Lack of liquidity limits an investor’s ability to acquire and sell assets rapidly at affordable prices, making it difficult for him to achieve fair market value for his Demat account shares or his targeted exit price.
Important information regarding Penny Stocks
Here are a few crucial aspects about penny stocks that every investor should be aware of:
#1 – Penny stocks are ideal for novice investors
Penny stocks are often solid bets for beginner investors who are just starting started with stock market trading. They allow you to experiment more freely, allowing you to understand the ins and outs of trading first-hand. The initial investment in a penny stock might be cheap because the price is often kept low. This also aids in limiting your losses.
#2 – Penny stocks can yield a lot of money
Not all penny stocks, contrary to popular belief, are doomed to fail. There are numerous appealing companies with strong financials and growth potential that are being traded at bargain prices. You may produce good returns and watch your initial investment grow by accurately recognising these companies and investing in them. However, to receive good returns, you may need to hold your investment for a longer period.
#4 – Liquidity is often poor with penny stocks
Because penny stocks have a small market value, they are not widely traded on the stock exchange. Due to the limited volume of commerce, finding prospective buyers and sellers may be difficult. You can get around this constraint to some extent by holding penny stock shares for a long time. To accumulate or exit the shares, you can use a staggered buying or selling strategy.
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Penny stocks are low-cost shares of start-up enterprises. Selling and purchasing small firm stocks is referred to as penny stock trading. These stocks have a lower trading volume than their market capitalization. The prices of penny stocks do not usually follow the movements of larger corporations.