Low Price, High Risk: What Are Penny Stocks & Should You Invest In Them?

Have you ever come across extremely low-priced stocks in the stock market? Those priced at as low as, for example, Rs 5 or Rs 10? They seem so cheap in terms of stock price, right? Such low-priced stocks are generally referred to as penny stocks.

But what are penny stocks? And should you invest in them? Let's help you understand this concept.

What Are Penny Stocks?

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As their name suggests, penny stocks are stocks that are priced very low, mostly under Rs 10 or 20 per share, and such companies have low market capitalization as well. A company¡¯s market cap is the value of outstanding shares trading in the market. Some examples of penny stocks in India include Vodafone Idea, Yes Bank, Unitech Ltd., Reliance Communications, and many more.

Features Of Penny Stocks

They Are Illiquid In Nature

Penny stocks are illiquid in nature. As per Groww, this means that they are traded much less in quantity as compared to other stocks in the market. By illiquid, we mean you might find it difficult to find buyers and sellers for such stocks in the market.

Tricky Returns

This is a tricky one. Most claim that penny stocks give very high returns, but in reality, it would be wrong to assume so. While it is true that since the stocks are priced so low, there is a high potential for the stock prices to go up and give you higher and faster returns when compared to companies that have already reached that stage, it is also true that you would then be treading in tricky waters. There is no guarantee that the stocks will become multibaggers.

Have The Potential To Turn Multibagger

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Some of these stocks have the potential to evolve into multi-baggers. It means shares that yield multiples of the investment amount, as per Groww. If a specific security reaps double its investment amount, it is called a double-bagger, and if it returns ten times its investment value, it is considered a ten-bagger.

Including them in your portfolio could exponentially increase your return prospects and might outperform large and mid-cap funds. However, conduct thorough research into the choice of penny stocks to gauge which stocks have the potential to be multibaggers.

Witness Unpredictable Pricing

Penny stocks might not attract adequate pricing during the sale. It might result in a lower or non-existent profit margin. Similarly, these stocks could also attract a price significantly higher than your cost, resulting in a considerable profit.

Pros & Cons Of Penny Stocks

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Advantages Of Penny Stocks

-Penny stocks are extremely volatile, yet they have the potential to produce extraordinary gains. They have the potential to deliver rapid growth in a short period of time, making them a popular choice among investors.

-With a tiny amount of money invested, you can make significant profits.

-The bulk of penny stock traders start with small amounts. As per Groww, an individual with Rs. 10,000 to trade may only be able to purchase three or four shares of a blue-chip company. But they might buy thousands of penny stock shares for the same amount of money.

-Not all penny stocks experience rapid price movement.

Disadvantages Of Penny Stocks

-Penny stocks in India have the highest risk of all investments. This is because they are speculative and can offer higher returns and losses. Therefore, if you are interested in penny stocks, starting small and gradually increasing your investment as you go along is advisable.

-Due to a lack of liquidity, holders find it difficult to cash out. Penny stocks are frequently traded in low volumes.

-Artificially increasing share prices may result in false representations about the company's position, a sort of fraud in microcap stocks known as the "pump and dump" approach.

Disclaimer: Please keep in mind that stock performance can change as per market conditions and the economy, and it's important to conduct thorough research before making any investment decisions. Additionally, consult with a financial advisor to get advice based on your investment goals and risk tolerance.

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