Penny stocks : Penny stocks are stocks that have very low price and market capitalization. Usually the stocks whose price is less than Rs 20-25 are called penny stocks.
Most of the new traders prefer to choose penny stocks because they think, if they would buy 1000 shares with 50,000 capital, no of shares will be only 50.
But if they choose share with price of 4-5 Rs, no of quantity will be even more (around 10000 quantity).
If by luck price of share goes double 8-9 rupees then they will make good profit in a short time.
This thinking is completely wrong because penny stocks are worthless.
This does not mean that high priced stocks are good. Whether a stock is good or not is completely decided on the basis of that company and its fundamentals.
But this is not the right way to choose the stock, by looking at the price of the share..
Many people think that the company whose share price will be the highest, that company will be a large size company whose share price is low, that company will also be small but it is not true.
For example we take two companies first company is ABC whose share price is around 20000 rupees. And the other company is xyz whose share price is around Rs 400.
Company’s M-Cap (Market Cap of a Company)
= Price of 1 share of the company × Total number of shares issued in the market (No of Outstanding shares)
M- Cap of ABC = 2000 × 1000
= 200,0000 rupees (Rs. 20 lakhs)
M-Cap of xyz = 400 × 100000
= 400,0000000 rupees (Rs 4 crore)
Here we should know about the market capitalization of both the companies to know the size of the company, the higher the market capitalization of the company, the bigger the company will be considered.
Here, for the market capitalization address, the price of one share is multiplied by the total number of outstanding shares issued in the market of that company, then the market capital of that company is known.
Thus we can see that xyz is a bigger company than ABC even though the share price of xyz is less than the share price of ABC. Therefore, you should focus on the company’s products, fundamentals and the size of the company rather than the share price.
When it comes to penny stocks, the first thing you have to see is why that stock is a penny stock. You will have to do a thorough deep research and analysis about all these.
There are some penny stocks that if you try to sell, you will hardly find buyers. Such penny stocks have very few liquids.
There are also some penny stocks that can convert your small investment into big capital. For example
Rakesh Jhunjhunwala had invested in Titan in 2000-2003 at an average price of Rs 4.5 which is a very big jewelery company today. And at this time the share price of Titan has exceeded 1000. Meaning this investment of his has given him returns of manifold.
This does not mean that all penny stocks will turn out to be multibagger. Somewhere by mistake you have made your investment in a wrong penny stock, then your investment can also be lost.
That’s why you will have to work harder than other stocks to find a good penny stock. And these companies will have to be thoroughly researched.
Many penny stock companies are so small that it is very difficult to gather all the information about them, and such stocks are also prone to illegal activities. Investing in such penny stocks is a very risky business. Therefore, if you do not understand the stock market, then you should stay away from penny stocks or even if you want to invest then invest a small amount. And stay away from people who say that every stock was a penny stock in the beginning or at some point it is not the case that the price of any stock is determined by its IPO. Therefore, whatever money you are investing in (capital) is your hard earned money, so invest wisely.
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Nirmal is a NISM Certified Derivative Trader & the Founder of InvestandEarn.net (Financial Blog). He entered the world of Equity research to explore his interests in financial markets having 5+ Years of Experience in Share Market Trading & Investing. Nirmal frequently writes about Share Market Trading & Investment and publishes his personal view on the market. Drop him a mail at email@example.com.