Penny stocks are those that trade at a very low price, have very low market capitalisation, are mostly illiquid, and are usually listed on a smaller exchange. In the Indian context, penny stocks generally have prices below Rs 10.
Penny stocks are typically very speculative in nature, and are considered highly risky because of lack of liquidity, smaller number of shareholders, large bid-ask spreads and limited disclosure of information.
Penny stocks are highly risky, but because penny stocks are low-priced, even a small increase in the stock price can result in significant gains. This can be appealing to investors who are looking to make a large return on a small investment.
If you own 10,000 shares of a penny stock priced at Rs 5, even a Rs 2 rise in the share price can take your investment to Rs 70,000 in a single day. This is unlikely in the case of a large stock, because it would require large capital to buy such a large volume of shares.
Penny stocks are often issued by smaller, newer companies that may be poised for growth. Investing in these companies at an early stage can potentially lead to significant returns if the company becomes successful.
Because penny stocks are often traded on smaller exchanges, they can sometimes be more easily bought and sold than larger, more established stocks. Also, penny stocks are generally inexpensive to purchase, which can make them accessible to investors with limited funds.
While some penny stocks have turned investors' millionaires, there are a lot of downsides to penny stocks too, as they are prone to price manipulations, sudden delisting and regulatory scrutiny.
Penny stocks are often subject to large price fluctuations, which can result in significant gains or losses in a short period of time. This can be appealing to some investors, but it also means that penny stocks can be very risky.
Since penny stocks are ultra cheap, one can move the stock by buying thousands of shares and create a spike without leaving any cue for the average investor to know whether the spike in price is genuine or manipulated.
Fraudsters use high-pressure sales tactics wherein they fool people into buying a penny stock, then use false information to inflate the share price and draw in more unwitting buyers. This is the “pump” part.
Once the share price rises high enough, the scammers sell off all of their shares - that is the “dump” part. This collapses the penny stock’s price and leaves everyone else holding a worthless stock.
Unlike larger, more established companies that are required to provide detailed financial information, penny stocks may have limited or incomplete information available to investors. This can make it difficult to make informed investment decisions and can increase the risk of investing in a company that is not financially sound.
Investing in penny stocks is a high-risk investment strategy that should only be undertaken by experienced investors who are able to handle the risks associated with this type of investment. Do your own research and consult with a licensed financial advisor before making any investment decisions.
The content in the story is for information purposes only. Investors or market participants should consult their financial advisors before taking any position