If you have invested in the Stock Market or you are considering investing in it, then you would have heard about Penny Stocks. In this article, we will have a look at the details of penny stocks and how you can make money from Penny stocks.
What are Penny Stocks?
Penny stocks are traded at a low price and volume. Penny Stocks are traded on the NSE & BSE.
The minimum price of penny stocks is Rs. 0.01. Penny stocks are traded on over-the-counter bulletin boards. Investors do not buy these securities from the company itself but from brokers or dealers. Dealers make a profit by marking up the price of the stocks that they are selling.
Penny stocks get sold at very low prices. Penny stock companies have low capitalization in the market. The market capitalization of these companies is less than Rs. 10 Crore.The gains may be in the range of 300% to 500% or even higher. You can gain up to Rs 500/- profit even if you have a small investment of Rs 100/-,
How to spot a potential penny stock?
Penny stocks are quoted with two different prices – bid price and ask price. The price at which a dealer is willing to buy the security from you is the Bid Price. The asking price is the price at which dealer will sell you that security. The difference between Bid price & Ask price is called the spread, and it varies with different penny stocks.
The spread shows how expensive or cheap a penny stock is being traded. The wider the spread, the more expensive it is for investors to buy them. It means higher risks for investors who hope to gain from price appreciation of these securities.
You should research the company and its current status to identify the potential Penny stock. You should know about the trends in the industry and how it affects this company. You should also look at what companies have done in the past that were successful with penny stocks.
You need to follow some financial specialists or stock advisors as they understand the business very well since the prices of penny stocks are unstable.
You should investigate the company’s financial statements and then determine its value before investing in Penny stocks.
Risk Involved in Penny Stocks
Penny stock trading is not suited for everyone. You should know the following points before trading in Penny Stocks:
1) Penny stocks generally have higher price volatility than blue-chip stocks. The prices of penny stocks may fluctuate substantially in a short period of time than other securities such as blue-chip stocks. This is a major concern for the investors.It is possible to lose all of the money that you have invested in penny stocks.
2) There are a limited number of buyers and sellers of penny stocks at any given point in time. Lack of adequate liquidity reduces the ability to buy/sell securities quickly at reasonable prices.
How to Trade Penny Stocks?
You should research the company before investing in Penny stocks. You should research all you can about the stock including its fundamentals such as its P/L statement, management, advisory board, previous years’ performances, etc. You should practice to handle price fluctuations and patterns through paper trading. It will be best to trade in the live market with money once you have a grip on paper trading.
How to make money in penny stocks?
You need to follow these simple rules when investing in penny stocks.
- Low-priced shares appear to be a relatively easier way of making money.Hence, do not invest more than 3-5% of your corpus in penny stocks.
- There is a lack of reliable information about penny Stocks.Hence, it becomes difficult to make an informed judgement In the absence of credible facts about the company, like its management, operational numbers etc.So, You really need to search for the stocks that are ‘truly’ undervalued.
- You should study the trading volume very closely for the last 6 months to 1 year to check whether it is consistently high. Selling even 100 shares of Penny Stocks is difficult.
4. Penny stocks are more prone to manipulation.You should not get carried away by hyped-up media reports through newspapers, television shows, newsletters etc. You should do your own research about Penny stocks.
In this video, I have discussed in detail How to make money on Penny Stocks.
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Penny stocks can be attractive as very minimum capital is required to invest in these stocks. You should understand whether penny stocks will suit your investment style as well as your portfolio. There are many options to choose among penny stocks. Hence, you should make sure that you choose the right one.