COMPANIES

No Data Found

NEWS

No Data Found
Advertisement
EXPLAINED: What are penny stocks and why they are risky business for investors

EXPLAINED: What are penny stocks and why they are risky business for investors

Penny stocks often seem attractive because of their low prices and there are both pros and cons while investing in them. Find out why.

Sharmila Bhowmick
Sharmila Bhowmick
  • Updated Jun 13, 2022 1:50 PM IST
EXPLAINED: What are penny stocks and why they are risky business for investorsPenny stocks are usually floated by companies that have low liquidity, and the stocks do not trade easily as well as not too many want to invest in these companies.

Trading on the stock market is interesting, nevertheless one has to navigate through a deluge of jargons to get a hang of how things work. From stock categories to trading styles, there’s a lot to explore. Here you can find all you need to know about penny stocks.

Advertisement

What are penny stocks?

If you are starting out with investing in the stock markets, you may have come across a set of low-priced stocks. They are usually found on the lower sections of stock exchanges. These are penny stocks. These are released by companies lower than a market cap of Rs 5,000 crore.

How penny stocks have been redefined in the US

The United States Securities and Exchange Commission (SEC) initially considered any stock that traded at less than one dollar per share, as a penny stock. Now, the definition has been changed to include stocks that trade below five dollars.

Why are penny stocks risky?

Penny stocks are usually floated by companies that have low liquidity, and the stocks do not trade easily as well as not too many want to invest in these companies. Usually, people who have high-risk tolerance pick penny stocks. These stocks have a tendency to either give high consistent returns, or get completely wiped out if the company can’t sustain its business. Thus, penny stocks are volatile, with high reward potential as well as high risk.

Advertisement

Can you trade safely in penny stocks?

Yes, you can trade penny stocks safely if you take some precautions like imposing a stop-loss limit on the stock, which would indicate a point when an automatic sell will be triggered at a certain price point. While penny stocks can turn into multibaggers, it is always safe to start with an understanding that they are high-risk stocks.

What are the benefits if investing in penny stocks?

Notwithstanding the risks involved, the biggest benefit of investing in penny stocks is, of course, the potential for very high returns. They can give very high returns in a very short period of time and some even become multibaggers. Big returns are sometimes made on small amounts of money invested. The other benefit is the volume one can purchase when it comes to these stocks. What amount may get you a few blue-chip stocks can fetch hundreds of penny stocks.

Advertisement

How to spot penny stocks?

Due diligence and extensive research on the company is possibly the best step to take before investing in penny stocks. Monitor the investment closely. Put in an amount in penny stocks which you can afford to lose. Sell the stocks fast to make quick money when the stock is doing well.

Disclaimer: Business Today provides stock market news for informational purposes only and should not be construed as investment advice. Readers are encouraged to consult with a qualified financial advisor before making any investment decisions.
Published on: Jun 13, 2022 1:50 PM IST
Post a comment0