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.
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