Updated Mar 31, 2022

What are Penny stock?

What is Penny stock?

When it comes to accumulating wealth, the stock market offers a lucrative possibility. You can trade in the markets and achieve financial success by investing in the correct stocks by opening a share trading account. When it comes to investing in the stock market, most people stick to well-known large-cap and mid-cap stocks.

While that is a sound plan, penny stock investment can also help you achieve your financial objectives. This article will teach you all you need to know about penny stocks.

What are penny stocks?

Penny stocks are those that have a very low price tag. Companies with a low market capitalization issue these stocks. In the Indian stock market, a penny stock is defined as a stock with a current market value of less than Rs. 10. Penny stocks are not highly liquid and are traded infrequently due to their tiny market capitalization. Their prices are vulnerable to rapid and significant levels of volatility because of the low frequency of trade.

Even blue-chip stocks, penny stocks may not always be able to predict market movement using technical indicators. This is related to small bid-ask spreads, few price quotes, and a lack of price history in general. Penny stocks, on the other hand, might provide good trading chances if you plan your moves well.

How Penny Stocks Work

Penny stocks appeal to some investors because they allow them to buy a large number of shares for a low price. A low price, on the other hand, provides the door to enormous price swings, allowing for significant gains—or losses.

Penny stocks are riskier investments than larger company stocks due to the qualities that make them penny stocks.

Things you should know about penny stocks

Here are a few crucial aspects about penny stocks that every investor should be aware of:

Ideal for novice investors

Penny stocks are often solid options if you're a rookie investor who is just getting started with stock investing. They allow you to experiment more freely, allowing you to understand the ins and outs of trading firsthand. The initial investment in a penny stock might be cheap because the price is often kept low. This also aids in limiting your losses. 

Penny stocks increase surplus

Not all penny stocks, contrary to popular belief, are doomed to fail. There are numerous appealing companies with strong financials and growth potential that are being traded at bargain prices. You may produce good returns and watch your initial investment grow by accurately recognizing these companies and investing in them. However, to receive good returns, you may need to hold your investment for a longer period.

There is no entry barrier to penny stocks.

When dealing with penny stocks, you don't need much to get started. Penny stock price movements are largely speculative and do not follow or necessitate careful technical analysis. This makes them the ideal alternative for you if you're just getting started with stock market trading. To begin trading penny stocks, you do not need any certificates or substantial trading experience. With penny stocks, there are no entrance restrictions because all you need is an internet connection and an online trading account.

Liquidity is often low with penny stocks.

Penny stocks have a tiny market capitalization; hence they aren't traded very often on the stock exchange. Due to the limited volume of commerce, finding prospective buyers and sellers may be difficult. You can get around this constraint to some extent by holding penny stock shares for a long time. To accumulate or exit the shares, you can use a staggered buying or selling strategy.

Before Investing in Penny Stocks, Take These Precautions

Before investing in any company, it's a good idea to take safeguards. It's much more important with penny stocks. Before you acquire stock, do some research on the company via your brokerage, the RBI website, online screening services (subscriptions may be necessary), or elsewhere to learn the following:

• How the business generates revenue.
• The board of directors and the company's management.
• Whether or not the stock's trading has been halted (available on the SEBI listings of stock trading suspensions).
• Any company or advisor that delivers unsolicited stock recommendations' background and registration status (using the RBI database).

Every investor has heard the adage "high risks, high profits" at some point. The more information you have on the penny stocks you intend to invest in, the more likely you are to reap the benefits.

How to purchase penny stock shares 

If you're willing to take the risk of buying penny stocks, you can do it through most major online brokerages. To protect investors, certain brokers may impose restrictions on these transactions. Another factor to consider when investing in penny stocks is the number of broker fees you'll have to spend. If the costs you pay are excessive, the profits you make from penny stock investments may be wiped entirely.

Conclusion

While penny stocks might be good investment options for most people, they, like other types of equity, come with inherent hazards. Such equities' price movements can be erratic at times, raising the risk factor. Thus, before buying, if you choose the correct penny stock, these risks can be avoided to some extent.  

Conducting detailed fundamental and technical analysis is one technique to determine the legitimacy and wealth-creation potential of a penny stock. It's best to avoid putting too much stock in other people's ideas or predictions and instead conduct your study.