Penny Stocks – Definition, Risks, Investment Strategy & more

Just like reputed company stocks are present in the stock exchanges, that trade on high prices, other types of stocks are as well traded. One such kind of stocks is the Penny Stocks.

As the name denotes, the penny stocks are the ones which trade at pretty low prices. Specifically, the stocks of companies that undertake business in smaller scale are referred to as penny stocks. Precisely the small public companies are accounted for here.

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What are Penny Stocks?

Penny Stocks

Penny Stocks are the ones, which have their place in the stock exchanges, but are not as liquid as the other stocks.

There are stocks which trade at pretty low prices, though they are available in reputed stock exchanges. They generally are traded over the counter (OTC).

The exact definition of penny stocks differs. It differs as per the geographic boundaries, i.e. the country in concern. United States considers share below 5 dollars as penny stocks, whereas the United Kingdom considers stocks priced below 1 pound.

Penny Stocks in India however, as marked to be below Rs.10 and their market capitalization is below Rs.100 crores. Almost, as much as 25% or more, stocks in BSE listing are penny stock, while they account for 10% in NSE.


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How to Invest in Penny Stocks?

Though a fair portion of investors would consider these stocks to be risky, here are some rightful ways in which you can invest in them. If you follow up on such Penny Stocks Investment Strategy, there are proportionate chances of making worthwhile returns.

  • One must refrain from investing huge amounts of money in such stocks. In accounting terms, experts suggest no more than 10% of total investment in such stocks.
  • Diversification might be your plan, but it doesn’t apply here. You mustn’t invest in a huge number of penny stocks, from different company. The key is to invest in selective stocks, mostly ranging in between 2-3.
  • Penny stocks must only be short term oriented. Investing for long terms must be avoided. As soon as a good amount of hike, or at least partial profits are reached, that must be all the time you need to give it.
  • Taking advises must be avoided highly. No person would provide you with the right advice, as they have their mere strategies to get investors invested in the portfolio they offer.
  • Your focus must be on stocks which are traded in high volumes, and not in limited number. It is so, you will be able to avail for liquidity and easily get yourself off them.
  • Rounding up your investments should not be done through purchasing more stocks. If you bought a share which is trading at low price now, you must not buy more of such shares. The only way to maximize profits is to keep selling when price moves upwards.
  • Never dwell yourself in over confidence, you may end up taking wrong decisions. Early gains must not mis direct investors, and take apart their strategies.

Why Penny Stocks are Risky for Investment?

To make you well adhered by the characteristics of penny stocks, we have drafted a list of reason why to would be risky to Invest in Penny Stocks.

  • Such stocks are low on liquidity level, and being able to sell the share when aspired may not be reached. It is because penny stocks are generally traded over the counter.
  • Baby or the young companies make up for such stocks. Hence, investors cannot have their hands on their historical information. Information like records of operations, products, assets, revenue etc are generally not found.
  • These small cap companies aren’t instructed to file reports. Hence, for investors, getting their hands on the public information is quite difficult, barring them from taking accounted decisions.
  • These stocks also do not have a minimum listing requirement. The over the counter trade, generally does not demand of a minimum requirement.

Benefits of Penny Stock Investment

While one might think of the risk associated to Invest in Penny Stocks, there are reasons why they still are in demand. Here are few of the advantage which investors can consider, in order to make investments.

  • Small companies which are low on investments and high on business strategies find means here. They get their hands on funds here, with the possibility to maximize and provide likewise returns.
  • Low per share price makes it easy for investors to invest, who lack sufficient funds for high investments.
  • Shares can be easily bought and low prices make it easy for high volume purchases.
  • Penny stocks tend to go up in quick intervals, and this makes them reward able.
  • Penny stocks have high probability to quickly moving up to mid cap level, where the returns provided are greatly amplified.

Price Fluctuations in Penny Stock

Penny Stocks are the greatest prone element of stock market fluctuation or volatility. This makes such investments a significant source of high returns and also a sign for greater doom.

Making an attempted buy may make it a loss more than their investment, or even an entire loss of investment.  Investment in Penny Stocks NSE must be done with realistic expectation.

It means the investors with make investments knowing such stocks possess high risks, which are less liquid. They are traded in low volumes thereby attracting a host of other kind of risks.


Penny Stocks – Conclusion

While the Penny Stocks provide the opportunity for small companies to grow and maximize, transforming into mid cap companies. They still have a set of downfall for investors.

It is advised, investors who have a greater tolerance for risk must invest in such stocks. As they go on the contrary to the blue chip companies, they have all the traits of failure.

If investors are immune to a level of loss, with the confidence of high returns, they may choose to invest in such shares. There sure exist a few advantages, and they cannot be otherwise overlooked.


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