Penny Wise, Pound Foolish

The fear of missing out, commonly known as FOMO, is gripping the Indian equity market. Early warning signs are evident with penny stocks (shares of companies whose stocks prices are lower than their face value) gaining momentum. In the past three months, stock prices of 36 such companies have gained over 50 per cent, of which 12 companies gained more that 100 per cent.

In comparison, the BSE Sensex rose 6.7 per cent. With large-cap riding high on sustained liquidity flows, especially from mutual funds, players looking to make a quick buck are getting into junk stocks, hoping these will rally. With the BSE Sensex touching 35,000 for the first time on January 17, 2018, the price/earnings ratio in India is the highest among its peers across the globe, including developed and emerging markets. In such a scenario, one should refrain from trading in penny and junk stocks to avoid being caught on the wrong foot.

Mahesh Nayak