You have probably heard of penny stocks before. They are the low-priced, high-risk, and often unregulated shares of companies that trade on the over-the-counter (OTC) market or pink sheets. They are also known as micro-cap, nano-cap, or OTCBB stocks.
Penny stocks are not for the faint of heart. They are notorious for being volatile, speculative, and prone to scams and frauds. Many investors avoid them like the plague, and for good reasons. Investing in penny stocks can be a quick way to lose your money if you don’t know what you are doing.
However, penny stocks are not all bad. In fact, they can be a great investment option for some investors as long as they follow some guidelines and precautions.
Reason 1: Huge returns in a short time
Penny stocks are priced so low that even a small increase in price can result in a large percentage gain. For example, if a penny stock goes from Rs 0.10 to Rs 0.20, that is a 100% return. If a blue-chip stock goes from Rs 1000 to Rs 2000, that is also a 100% return. But the difference is that the penny stock only needs to move ten paise, while the blue-chip stock needs to move 1000 rupees.
These stocks can also be very volatile, fluctuating rapidly and unpredictably. This can create opportunities for savvy traders who can spot trends and patterns and take advantage of price movements.
Reason 2: Helps in portfolio diversification
Diversification spreads your investments across various assets, sectors, or industries to lower your risk and enhance your returns. This way, you can shield yourself from changes in the market, the economy, or the industry that may harm some of your investments more than others.
Penny stocks can provide exposure to different sectors and industries that may not be well-represented in the mainstream market. For example, you may find penny stocks that belong to emerging or niche markets, such as renewable energy, biotechnology, or e-commerce, that have high growth potential but are not yet widely adopted or recognised by the public or investors.
Read More: Penny Stock in India 2024
Reason 3: Helps discover hidden gems in the market
Penny stocks are often undervalued, overlooked, or ignored by the mainstream market due to their low visibility, reputation, or coverage. However, some may have strong fundamentals, growth potential, competitive advantages, or innovative products or services that are not yet reflected in their prices.
For example, Infosys, a global IT giant, was once a penny stock, trading at around Rs. 1.86 per share in 1993. Today, it is worth over Rs. 1,700 per share, a mind-blowing 91,000% increase in 31 years. Similarly, Wipro, another IT behemoth, was trading at around Rs. 1.10 per share in 1993. Today, it is worth over Rs. 499 per share, a whopping 45,363% increase in 31 years.
Reason 4: Allows you to invest in undervalued or turnaround companies
Undervalued companies are those trading below their intrinsic value for various reasons, such as poor performance, financial problems, or legal issues. Turnaround companies are those undergoing a process of recovery or improvement in their fundamentals, such as debt restructuring, asset sales, or management change.
Reason 5: Investment with a small capital
Penny stocks are low-priced. You can buy many shares with a small amount of money. For example, with Rs. 1000, you can buy 200 shares of a stock priced at Rs. 5 or 1000 shares of a stock priced at Re. 1. This can give you a higher exposure and a higher chance of making profits.
Penny stocks also have lower brokerage fees and commissions than higher-priced stocks, making them more cost-effective and profitable. Brokerage fees are usually levied as a percentage of the transaction's worth or as a flat fee per trade.
Conclusion
Penny stocks can be a good investment option for some investors as long as they are aware of the risks and allocate only a small portion of their portfolio to them. These stocks require a lot of research, analysis, patience, and discipline. However, they also involve a lot of uncertainty, speculation, and luck.
Related Articles: Understanding Penny Stocks In India | Difference Between Blue Chip & Penny Stocks | Unveiling the top-performing penny stocks of the last year
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