In the Indian financial markets, a penny stock refers to a stock that is trading at a very low price. These penny stocks mostly belong to the micro- or small-cap companies that trade anywhere between ₹0 and ₹20 per share and penny stocks under ₹1 are really risky.

As these companies belong to the micro- and small-cap companies, their market capitalization is less than ₹1000 crore. As these stocks are low priced, they are very popular among retail investors. In this article, we will discuss more about penny stocks in detail, the risks involved and who can invest in them.

Why are Penny Stocks Attractive?

Penny stock has a low entry barrier in terms of price. In other words, they are cheap and an investor can buy thousands of shares for ₹5,000 or ₹10,000. This makes buying penny stock affordable.

Some fundamentally sound penny stocks have the potential to become multi-bagger. As penny stocks’ price will be trading at a low price, even a small price jump can double, triple or quadruple your money.
Penny stocks can be a good addition to your portfolio diversification as these stocks are present in niche emerging sectors.

Investors having a higher risk appetite find penny stocks attractive as it has the potential for higher returns.

Are Penny Stocks Risky?

Penny stocks are risky due to many reasons. The reasons are as follows:

Penny stocks have low liquidity i.e. low volume. So even if you get a chance to buy a penny stock at a really low price, the chances of selling it at a higher price to reap potential gains is a tedious task.

These stocks are not tracked by analysts and big institutional investors like mutual funds, pension funds, insurance companies, banks, etc. and there is very little public information. As an investor you will be unable to make any informed decision.

Penny stocks are prone to price manipulation by market operators as these stock prices are artificially hiked and then the prices are made to crash by pump and dump schemes.

The probability of loss in penny stock is high because whenever there is a crash, the price can go to zero and it can become worthless.

Things to consider before you buy penny stocks

As an investor you must study the company’s balance sheet, profit and loss statement, and cash flow statement. You must also read their annual report, exchange filings and other research reports that are available about the company.

The company must have grown steadily in terms of revenue, operating profit and net profit. The company must be free cash flow positive at least for the last three financial years and it should be debt free penny stocks.

You must always check the promoter holding before investing and always track the metric. Promoters play a very significant and influential role in the growth of the company. A high promoter stake is always a positive sign as the promoters believe in the growth of the company and its success. In contrast, if a promoter reduces their stake in the company, it sends a negative sign to the investor community and it can result in low investor confidence.

Though penny stocks can be risky, picking the right penny stock from sunrise sectors or high growth industries like renewable energy, data centre, consumer internet, etc. can be rewarding for the investors if the company maintains its growth momentum and the investment is for the long term. For example, Suzlon Energy was a penny stock but when the company’s performance improved, its share price rose quickly.

Make sure the penny stock has decent trading volumes so that you are able to buy and sell. If a penny stock has low trading volume, then the stock can hit upper circuit or lower circuit preventing you from buying and selling the penny stock at the desired time.

If you are planning to invest in penny stocks, then you must have a high risk appetite and the risk tolerance to absorb any short-term losses.

How to buy penny stock?

• Open a free demat account with Aetram Trades by clicking the link
• Research for good quality stocks in emerging industries using Aetram’s screener
• Add good quality penny stocks in your watchlist
• Keep tracking the price movements of these stocks using the technical charts available in Aetram Trades trading app so that you don’t buy overvalued stocks. Always ensure the market price is less than the stocks intrinsic value
• Always maintain sufficient funds in the bank account linked to the demat account opened with Aetram Trades
• Place your order at the desired time and the penny stocks will be shown in your demat account.

Frequently Asked Questions

1. I am new to the Indian stock market. Can I invest in penny stocks?

Yes. You can invest in penny stock after doing due diligence of the company and understanding the risks of investing in penny stocks.

2. If I want to invest in safer stocks, what are my choices?

If you are a beginner, you can take a look at blue-chip stocks. You can also pick stocks from Nifty 50, Nifty 500 of Nifty Small cap 250, etc. for your investments.

3. If I buy penny stocks, will I get dividend income?

Most probably no. Companies of penny stocks do not post stable earnings every year.

4. Can I buy and sell penny stocks using Aetram Demat Account?

Yes. Using your free demat account with Aetram Trades, you can easily buy and sell in a few clicks.

5. How safe is it to invest in penny stocks?

Penny stocks are risky and can cause heavy losses. It is risky due to factors like low liquidity low transaction volume, high price volatility, very little public information, etc.