What are Penny stocks? Pros & Cons of penny stocks

Read about the benefits and drawbacks of penny stocks and if you should invest in them.

Does it make sense to invest in penny stocks

The stock markets provide an excellent opportunity for wealth creation. When it comes to making money, most people tend to stick to well-established stocks. You may trade in the markets and achieve financial success by investing in the right stocks by opening a share trading account. 

While that is a sound technique, investing in penny stocks can also help you achieve your financial objectives. You may simply invest in penny stocks if you have an online trading account. If you're wondering what penny stocks are, here's some important information to help you figure it out.

What are penny stocks?

Penny stocks are stocks of smaller companies wherein the price of a share will usually be Rs 10 or lower. They are also known as Microcap or Nano cap Stocks. Though these stocks trade mainly through OTC transactions, some do trade on larger exchanges such as the New York Stock Exchange (NYSE).

What constitutes penny stocks in India?

In India, companies with less than Rs 5000 crore market capitalisation fall in the category of small companies. Penny stocks in India cost less than Rs 50, and most will trade for a much smaller price. Because of their modest value, they are always listed much lower than other shares in stock exchanges. 

Now let’s explore the pros and cons of penny stocks.

Also Read: Best Dividend-Paying Penny Stocks In India

What are the benefits of trading in penny stocks?

As we saw, the price of penny stocks is minimal. So, a significant number of people are able to afford them. For those who are ready to invest a larger sum, it gives the advantage of being able to buy a high volume of shares. Since most smaller companies are either new or in their growth stage, chances are they will make a good profit and likely give stock buyers high returns.

The penny stock market can be very volatile and go up or down quite frequently. When the price increases, investors will make a good profit. Since most people invest only very little capital in penny stocks, even when prices go down, they do not lose much.

Also Read: 5 Tips To Follow While Trading In Stocks

What’s bad about penny stocks?

Lack of transparency is often a major problem one faces while investing in penny stocks. As most of the smaller companies are either new or not very well-known, there may be no financial history for the company, especially nothing that is publicly known.

Many penny stocks may be illiquid stocks that do not easily attract buyers. So, if the investor has a financial emergency and wants to sell their stocks, they may have to offload it for a loss. Most penny stocks trade infrequently, so investors may have to wait long to encash or transfer their shares.

Small companies are often floated by scammers who may buy many shares to project a picture of financial stability. This is done for attracting more investors, who will eventually lose their money since the company owners are fraudsters.

Also Read: Diversify Your Equity Portfolio By Investing In Stocks Overseas

Investing in penny stocks in India

Despite the high risks involved with penny stocks, you can invest in them if you are aware of the exact type of business the company is doing, its growth profile, solvency level, and promoters’ shareholding patterns. It is advised to buy only such penny stocks that have a good trading volume so that the chances of them becoming illiquid are very low.

How to pick the best penny stocks?

There is no fail-proof method of how to choose a stock, but there are ways in which a company’s fundamentals and financial history can be researched through a third party. In India, there are investment advisors registered with the Securities and Exchange Board of India (SEBI), who can help significantly in finding out the background and investment-friendliness of a company. You could consult one of them before taking the plunge.

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