The stock market is the best place that provides you with the opportunity to the creation of wealth. By opening a trading account and by investing in the right stocks, you can trade in the stock market and achieve financial success. Usually, investors prefer to play safe and choose to invest in stocks that are well-established large-cap or mid-cap stocks.
Although this strategy is safe and rewarding, investing in penny stock can also give you good returns and help you achieve your financial goals. If you open up an online trading account, then you can easily invest in penny stocks. Now if you are want to know about the meaning of penny stock, we will discuss all about penny stocks in this article.
Penny stocks Definition
Penny stocks are stocks that are usually traded at a very low price. They are usually offered by companies with lower market capitalization. They are mostly listed on smaller exchanges. Therefore, they are also called nano-cap stocks, micro-cap stocks, and small-cap stocks based on market capitalization.
The market capitalization rate can be determined by multiplying the current share/stock price with the number of outstanding shares. Based on this, companies are indexed in the well-known stock exchanges such as National Stock Exchange and Bombay stock exchange. Penny stock lists are usually found in the lower section of the stock exchange or on lesser-known stock exchanges.
In the Indian market scenario, a penny stock is defined as a stock with a market value of Rs. 10 or below. They are traded very infrequently and are not very liquid in nature. The prices of these stocks are subject to sudden or high levels of volatility as the frequency with which they are traded is very low.
It is almost impossible to predict the price movements using technical analysis of penny stocks, unlike stocks that belong to blue-chip companies. This is due to the sparse price quotes, lack of price history, or narrow bid-ask. If you plan your moves right, then penny stocks are a good trading opportunity. By starting an online trading account you can easily buy and sell penny stocks.
Features of Penny stocks
Now we shall look into the features of the penny stock. By this, you will have knowledge about the things that you should about before investing in Penny stocks.
Perfect for beginners: Penny stocks are a good choice to invest if you are new to the stock market field. They give you immense freedom to experiment and allow you to learn from your mistakes by trading first-hand. As the prices are low, you need not invest a lot of your capital. It also helps you control your losses.
High Returns: Compared to other forms of securities, these stocks provide you with high returns. Usually, the shares are issued by small-cap and micro-cap companies and so they have the potential to grow over time. Not all penny stocks are destined to fail. There are various companies with good potential and good financials. Make sure that you invest for a long time to get a good return.
Illiquid: In India, Penny stocks are illiquid in nature. This is mainly because the companies that issue them are usually unpopular. It is hard to find investors who would want to invest in these penny stocks. This does not come to use especially during emergencies.
Lack of entry barrier: There are very little to no formalities that should be done before dealing with penny stocks. While investing, these stocks do not need Methodological analysis. If you want to get started with stock market investing or for practicing first-hand trading, then investing in penny stocks is the best. There is absolutely no barrier ahead of trading; you just need an internet connection and a trading account.
Why should you invest in penny stocks?
Investing in a penny stock is a hit or miss. There is no guarantee that you will have a profit or not. In some cases, the companies that issue penny stocks may flourish over the years or may go into debts. Here are reasons why you should invest in a penny stock.
Multi bagger: Certain stocks might flourish into huge multi-baggers over the years. These shares may yield multiples of the investment amounts. Including such stocks may double or in some cases, the returns will be ten times higher. Thorough research on these stocks are required to identify such stocks.
Inexpensive: The highlight of investing in penny stocks is that they are the cheaper option to buy. Even if you have limited financial resources you can venture into investing.
Although there are a lot of benefits for penny stocks, they also come with huge risks. The following are the risks factors that you need to consider apart from the basic risks that come with market-linked securities.
Limited Information: Usually penny stocks are issued by start-up companies and these companies lack information on their financial stability, past performance, growth prospects, etc. investing in companies which does not have much information involves huge risk.
Scams: You should always be aware of the scams related to penny stocks.
While considering buying penny stocks, always make sure that you do your share of thorough research. Information on the financial stability, past performance, growth prospects are key before starting trading. Companies with potential and integrity will provide investors with amble information they need. FAQs
What is considered a penny stock in India? Penny stocks are those that trade at a very low price. They are usually offered by companies with lower market capitalization and are usually illiquid. Is it safe to invest in penny stocks in India? Investing in penny stocks in India involves great risk especially because they are highly illiquid in nature. However, if the fundamentals of the company are strong you need not worry much. How do beginners invest in penny stocks? Penny stocks are very beginner-friendly. All you need to start investing is a stable internet connection and a trading account. There are minimal barriers to starting a trading account.
What do you think? Please email us any questions or comments.
Disclaimer: Information contained herein is not and should not be construed as an offer, solicitation, or recommendation to buy or sell securities. It is for educational purposes only.For more information, see our Legal disclosures here.