Nowadays, investing is regarded as a smart move. However, as the number of investment methods increases, so do the options that investors have. While some choose to participate in the stock market, others choose to use mutual funds. The stock market offers a wide variety of shares, including penny stocks.
This blog is for you if you’ve ever wondered “what are penny stocks”? The definition, advantages, dangers, and investing strategies of penny stocks will all be covered in detail here.
The definition of penny stocks
Stocks with extremely low values are known as penny stocks. These are regarded as equities that trade for less than $5 in the United States. In India, penny stocks are typically defined as equities with a price of ₹10 or less
Penny stock characteristics
- extremely affordable (between ₹1 and ₹10).
- shares of small businesses.
- low market value.
- high chance of return and high risk.
- Insufficient liquidity.
- information that is inconsistent and opaque.
On small stock exchanges or over-the-counter (OTC) markets, penny stocks are frequently traded. Although investing in them is inexpensive, there is a significant risk.
Why do investors purchase penny stocks
The question of why people invest in penny stocks now emerges. This is primarily due to the low cost and potential for large profits.
1. More shares at a lower cost
You can purchase 1000 shares of a stock for ₹2000 if it is worth ₹2. Your money doubles if this stock rises to ₹4. These stocks are appealing to people because of this prospect.
2. The chance to invest in start-up businesses
Small or new businesses are frequently represented by penny stocks. The price of a company’s stock can rise significantly if it succeeds. This illustrates the “invest quickly, earn more” dream.
3. Portfolio diversification
By using less money to invest in several businesses, investors can spread their risk. The other stocks can be rewarded if even one does well.
What dangers come with penny stocks?
1. The degree of volatility
Penny stock prices are subject to rapid fluctuations. In a single day, they can increase or decrease by fifty percent.
2. Limited liquidity
Purchasing these stocks is as simple as selling them. Sometimes there is no buyer.
3. Fake promoters:
To promote certain penny stocks, fake news is disseminated on WhatsApp groups and social media, misleading investors.
4. Business insolvency:
Penny stock companies frequently have poor financial standing and a significant chance of going out of business.
Advice on Penny Stock Investing
1. Compile company information:
Before making an investment, learn everything there is to know about the firm’s financial statements, management, business plan, and track record.
2. Don’t trust rumors alone:
Avoid organizations that promote penny stocks. Watch out for the stock, which is now getting a lot of publicity.
3. Make Limited Investments:
Don’t put all of your money into penny stocks. Don’t do more than a modest portion.
4. Long Term Approach:
Exercise patience if you made your investment after conducting adequate study. You must give penny stocks time.
Regulations and Penny Stocks (SEBI’s position)
Penny stocks are closely monitored by SEBI (Securities and Exchange Board of India), which oversees the Indian stock market. Companies that deceive investors have frequently been banned by SEBI. As a result, it’s critical to keep up with the BSE/NSE and SEBI websites.
Are New Investors a Good Fit for Penny Stocks?
If you invest intelligently and research, then you can receive good returns from penny stocks. However, investing without expertise can also result in significant losses. It is recommended that novice investors start with modest sums and heed the counsel of seasoned investors.
Conclusion
Penny stocks are inexpensive stocks of small or startup businesses with the potential for high risk, high reward. These stocks have the potential to significantly impact your investing journey if you approach them with the appropriate knowledge and strategy.
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