Penny Stocks

Penny stocks are a form of market traded security which attracts minimal pricing. These securities are mostly offered by companies with lower market capitalisation rates. Therefore, these are also called nano-cap stocks, micro-cap stocks, and small-cap stocks, depending on the company’s market capitalisation.

A company’s market capitalisation rate is determined based on the product of the current price of its shares or stocks and the number of outstanding shares i.e. NAV of shares x number of outstanding stocks.

Based on this factor, companies are indexed in recognised stock exchanges such as National Stock Exchange and Bombay Stock Exchange. Penny stock lists are often found in the lower sections of such stock exchanges or lesser-known stock exchanges.

*The features of penny stocks are listed below* – • *High-returns* : These stocks provide much higher returns compared to other forms of securities. As such shares are issued by small and micro-cap companies, they have vast potential for growth. Consequently, penny stocks are risky, given its intensity of response to market fluctuations.

• *Illiquid* : Penny stocks in India are illiquid in nature, given the fact that the companies issuing them are relatively unpopular. It becomes challenging to find individuals who are willing to purchase these stocks, thus offering little aid during emergencies.

• *Low-cost:* In India, penny stocks are usually priced lower than Rs. 10. Therefore, you could purchase a substantial amount of stock units from penny stock list with a small scale investment.

 • *Unpredictable pricing:* Penny stocks might not attract adequate pricing during the sale. It might result in a lower or non-existent profit margin. Similarly, these stocks could also attract a price significantly higher than your cost; therefore, resulting in a considerable profit.

*Example:* 

Mr A invested Rs. 5000 in penny stocks of G Ltd., an IT start-up. Each unit costs Rs. 5. The firm bid well at the market and their penny stock value stood at Rs. 50 at the end of the FY 18 – 19. Mr A then sold his 1000 shares at Rs. 50,000, thus gaining ten times the return. This stock is considered a ten-bagger.

•  *Risks Associated with Penny Stocks* 

Given the scale at which the companies offering such stocks operate, they are prone to huge risks. These stocks heavily rely on the market conditions for growth in their value.

Apart from the basic perils which come with any market-linked securities, there are other forms of risks associated with penny stocks. These are Limited information & Scams.

• *Alternative Options to Penny Stocks in India* 

Individuals can also decide to invest in other investment options which are better suited to their objectives and risk appetite. Mutual Funds are one such option which is increasingly gaining popularity in the market. MFs are investment pools which involve multiple individuals investing in a single fund which is then used to purchase securities.

Team

Bazarwiz

NIFTY

NIFTY is a market index introduced by the National Stock Exchange. It is a blended word – National Stock Exchange and Fifty coined by NSE on 21st April 1996. NIFTY 50 is a benchmark based index and also the flagship of NSE, which showcases the top 50 equity stocks traded in the stock exchange out of a total of 1600 stocks.

These stocks span across 12 sectors of the Indian economy which include – information technology, financial services, consumer goods, entertainment and media, financial services, metals, pharmaceuticals, telecommunications, cement and its products, automobiles, pesticides and fertilizers, energy, and other services.

NIFTY is one of the two national indices, the other being SENSEX, a product of the Bombay Stock Exchange. It is owned by the India Index Services and Products (IISL), which is a fully-owned subsidiary of the National Stock Exchange Strategic Investment Corporation Limited.

NIFTY 50 follows the trends and patterns of blue-chip companies, i.e. the most liquid and largest Indian securities.

NIFTY contains a host of indices – NIFTY 50, NIFTY IT, NIFTY Bank, and NIFTY Next 50; and is a part of the Futures and Options (F&O) segment of NSE which deals in derivatives.

The eligibility criteria for getting listed on the NIFTY Index are mentioned below –

• The company must be a domicile of India and registered with the National Stock Exchange.

• Stocks must possess high liquidity, which is measured by their average impact cost. It is the cost of security transaction execution in relation to the index weight as reckoned through market capitalisation. It should be 0.50% or lower than that for a period of 6 months while 90% of the observations are made on a portfolio of Rs. 10 Crore.

• The company should have a trading frequency of 100% during the previous six months.

• It should have an average free-floating market capitalisation, which is 1.5 times higher than the smallest constituent in the index.

• Shares which have Differential Voting Rights or DVR are also eligible for the index.

Team

Bazarwiz

Types of Trading

Primarily, there are five types of share trading. These are –

*Day Trading:* 

This form of trade involves purchasing and selling stocks in a single day. In the case of day trading, individuals hold stocks for a few minutes or hours. A trader involved in such trade needs to close his/her transactions prior to the day’s market closure. It is popular for capitalising on small-scale fluctuations in NAV of stocks.

Day trading requires proficiency in market matters, a thorough understanding of market volatility, and keen sense regarding the up and down in stock values. Therefore, it is performed mostly by experienced investors or traders. 

*Scalping:* 

It is also known as micro-trading. Scalping and day-trading are both subsets of intraday trading. Scalping involves reaping small profits repeatedly ranging from a dozen to a hundred profits in a single market day.

However, every transaction does not yield profits, and in some cases a trader’s gross losses might exceed the gains. The holding period of securities, in this case, is shorter compared to day-trading, i.e. individuals hold stocks spanning a maximum of a few minutes.

This feature allows for the frequency of transactions. Similar to day-trading, scalping requires market experience, proficiency, awareness of market fluctuations, and prompt transactions.

*Swing Trading:* 

This style of stock market trading is used to capitalise on the short-term stock trends and patterns. Swing trading is used to earn gains from stock within a few days of purchasing it; ideally one to seven days. Traders technically analyse the stocks to gauge the movement patterns they are following for proper execution of their investment objectives.

*Momentum Trading:* 

In case of momentum trading, a trader exploits a stock’s momentum, i.e. a substantial value movement of stock, either upwards or downwards. A trader tries to capitalise on such momentum by identifying the stocks that are either breaking out or will break out.

In case of upward momentum, the trader sells the stocks he/she is holding, thus yielding higher than average returns. In case of downward movement, the trader purchases a considerable volume of stocks to sell when its price increases.

 *Example:* 

Mr A holds 7000 shares of S Private Limited at Rs. 50 per share. On 1st April 2019, he sees the NAV of such shares showing upward momentum. He decides to sell 3000 shares at Rs. 60 on the first day. After that, He sells the remaining shares at a uniform rate of Rs. 65.

Therefore, his overall profit from the transactions is –

Rs. {(3000 * 60) + (4000 * 65)} – (7000 * 50) or, Rs. 90,000

 *Position Trading* : Position traders hold securities for months aiming to capitalise on the long-term potential of stocks rather than short-term price movements. This style of trade is ideal for individuals who are not market professionals or regular participants of the market.

Impact of Online Trading?

The internet has significantly contributed to elevating stock market trading. It has made securities more accessible and convenient to the layman. An individual can now easily trade in the stock market through online trading in India.

Team

Bazarwiz