Investors and traders alike have always had a fascination with penny stocks. There are stories in the market about how a particular company’s stock trading at a few rupees worth suddenly jumped to give phenomenal returns in weeks or months.
Why is Penny Stock Trading Attractive?
Penny stocks are known to be appealing to stock traders and investors primarily due to the following factors:
1) Lower Cost Price
As the name suggests, penny stocks are generally available at an affordable price, generally Rs. 10 or lower.
2) Growth Potential
It is not uncommon in the market to hear stories of penny stocks that have risen in value by thousands of percentage points.
5 Key Features of Penny Stocks
Noteworthy characteristics of penny stocks are:-
- These are stocks of companies whose market cap is low, mostly lesser than Rs. 100 crores.
- These stocks generally have low liquidity.
- Many such stocks attract speculative stock trading.
- These stocks have huge growth potential.
- Penny stocks are available at highly affordable rates.
Should Penny Stocks Be a Part of Your Portfolio?
Although a significant percentage of penny stocks do not turn out to be multi-baggers, the fact still remains that some do put up stellar performances indeed. It is vital to note that you must never pick up stocks on hearsay.
On the other hand, a good, well-researched picking can be lucrative as the returns generated are very high. Another factor is that the investment needed here is meager as these stocks are available for a minimal amount.
It is always wise to do thorough market research and analysis before investing in this category.
Things to Keep in Mind During Penny Stock Trading
Five crucial factors to consider while stock trading in penny shares:
1) Business of the Company
It is advisable to research the company’s business activities. Try to gather news on whether it has plans to expand or modify/enhance its business.
2) Company’s Management
It is imperative to ascertain the quality and integrity of the management team. If there are reports about the company’s mismanagement or corrupt practices, it is better to stay away from such companies.
3) Shareholding Pattern
The company’s shareholding pattern can be a good indicator of where its affairs are leading. An unusually high holding concentration with one party can lead to pump-and-dump operations. You must check the percentage of institutional holdings as their research teams use extensive tools to understand a company’s workings.
4) Price Behaviour
Performance of the company stock price in the past can give some indications about the company’s direction.
5) Company’s Finances
It is essential to do a thorough financial analysis of the company. It would help if you understood its annual reports, cash flow, debt percentage, profit margins, and pledging shares by the promoters.
Want to know how to track corporate actions? Watch this video.
Penny stocks can give valuable returns on the investment if selected wisely. They have tremendous growth potential. However, selecting the right stock is not easy.
So, if you are considering penny stocks, make sure that you allocate a fixed percentage of your portfolio towards these investments and track them with a stock trading platform.
Happy Trading 📈
Disclaimer: This blog is not to be construed as investment advice. Trading and investing in the securities market carries risks. Please do your own due diligence or consult a trained financial professional before investing.