What are Penny Stocks in India?

Stock markets provide a lucrative opportunity when it comes to wealth generation. By opening a share trading account, you can trade in the markets and achieve financial success by investing in the right stocks. Typically, when it comes to stock market investing, most people tend to stick to well-established large-cap and mid-caps stocks.

While that is a good strategy, investing in penny stocks can also help you realise your financial goals. Here’s some everything you need to know about penny stocks.

What are penny stocks?

Penny stocks are such stocks that attract minimal pricing. These stocks are offered by companies with low market capitalisation. In the stock market scenario in India, a stock whose present market value is below Rs. 10 is typically labelled as a penny stock. Owing to the low market capitalization of these shares, penny stocks are not very liquid and are infrequently traded. Due to this low frequency of trading, their prices are subject to sudden and high levels of volatility.

Unlike in the case of stocks belonging to blue-chip companies, predicting the price movement via technical indicators may not always be possible for penny stocks. This is primarily due to narrow bid-ask spreads, sparse price quotes, and the general lack of price history. Nevertheless, penny stocks can present good trading opportunities if you plan your moves right.

Things you should know about penny stocks

Here are a few key points that any investor needs to know about penny stocks:

1. Penny stocks are perfect for beginners

If you’re a new investor and you’re just getting started with trading in the stock market, penny stocks are typically good bets. They offer a greater level of freedom to experiment, thus allowing you to learn the ins and outs of trading first-hand. Since the price of a penny stock is generally kept low, the initial investment can be low. This also helps cap your losses.

2. Penny stocks can generate high returns

Contrary to popular opinion, not all penny stocks are destined to fail. There are plenty of attractive companies with good financials and growth potential that are being traded for minimal prices. By identifying these companies accurately and investing in them, you can generate good returns and watch your initial investment grow. However, you may have to hold your investment for a longer period of time in order to get good returns.

3. Penny stocks do not have an entry barrier

You don’t require much to get yourself started when dealing with penny stocks. The price movement of penny stocks are mostly speculative and do not follow or require methodical technical analysis. This makes them the perfect choice for you if you’re just making your entry into the world of stock market trading. There are no certifications or extensive knowledge in trading required to get started with trading in penny stocks. Since you only require an internet connection and an online trading account, there are absolutely zero entry barriers with penny stocks.

4. Penny stocks are generally low on liquidity

As the market capitalization of penny stocks is low, these shares are not very frequently traded in the stock market. Due to the low volumes of trade, it might be challenging to find both prospective buyers or sellers. You can overcome this limitation to a certain extent by holding the shares of penny stocks for the long term. You can also adopt a staggered buying or selling approach to accumulate or exit the shares.

Conclusion

While penny stocks can be good investment options for most people, they do carry some risks, just like all kinds of equity. The price movement of such stocks can be unpredictable at times, thereby increasing the risk factor. However, these risks can be mitigated to a certain extent if you make sure to choose the right penny stock before investing.

One way to establish the authenticity and wealth-creating potential of a penny stock is by conducting extensive fundamental and technical analysis. It is advisable to refrain from putting too much emphasis on others’ opinions or predictions, and do your own due diligence while researching.