Penny stocks are shares of companies that have market capitalization (market capitalization-the total value or worth of the company) less than Rs.100 crore and each share trading below Rs.10. Do you know how many penny stocks trade on BSE or NSE. It’s 25% for the BSE and 10% for the NSE.
They look like a good grab as the downside seems limited. Penny stocks usually belong to companies with low quality management or negative future outlook. These penny stocks suddenly spring to life with huge volumes when there is an announcement or turnaround in the market.
Most Penny stocks are cheap for a reason. It is mainly because
- They have a low quality management
- Non-transparent corporate governance
- bad future business potential
- Bad balance sheet and bad profit/loss account
Penny stocks usually seem to belong to dubious promoters. These promoters sell their unworthy financial companies during the peak period. Once they have off loaded their junk, they slowly disappear from the light. The investors then get stuck with the bad investments.
Penny stocks usually have a promoter-operator nexus. The promoters usually hire investment bankers (low reputed mostly). These people in turn negotiate a deal with the operators who buy and sell shares anonymously with fake accounts. During boom times, people are ready to buy anything.
These operators carefully create a media frenzy or approach individual investors by mail/phone. They artificially push up prices and then offload these equity shares to investors. The profit is then shared between the promoter and operator.
Investors would have no idea as to what or how much shares were insider traded nor how long stocks were held. How many of you read the News and Announcements from BSE/NSE before buying penny stocks?
Risks in Penny Stocks
- You buy a stock thinking it will go up in future. If it has a stealthy management, you do not know its real profits. Will you lend to a friend who lies all the time? It is something similar to that
- There is a chance to lose 100% – The promoters can never return and your stock value goes from Rs4 to Rs 0. Yes it is a 100% loss.
- Your stock may be de-listed – BSE/NSE once a while, delists penny stocks to clear the bourse. Once it is de-listed you do not have chance to sell it.
- The trade volume value is too thin – You do not get a chance to exit as the value of shares traded is not uniform. It is big on some days and then zero on others. You cannot exit when you want.
Pros of penny stocks:
- If identified properly, the rate of return is huge. As high as 200-500%
- Some quality companies , due to temporary hiccups and bad environment end up as penny stocks. Once market and economy turns they bounce back giving super-normal returns.
- They are cheap. So you can buy large quantities.
If you have decided to get involved in penny stocks, make sure you follow these tips. This will help you avoid the major blunders that penny stock investors make.
- Don’t trade OTC stocks. OTC or Over -the-Counter stocks arenot well regulated as regular listed penny stocks
- Do own analysis and discard email/sms which promise you the next million in trade. They make you gullible targets
- Look for momentum in the stock. Learn some basic technical analysis.
- Try not to short penny stocks. They usually lead to losses unless you’re well aware of technical analysis and insider/market information
- Always have your stop losses in place. Don’t invest more than 5%of your total stock portfolio in a penny stock
- Choose high volume stocks. The total quantity of stocks traded each day must atleast be 10-15 times what you plan to buy. There is no use buying a penny stock which you can’t sell.
Following the above measures will protect the downside of your investment. If there is a mistake,then you can book a loss without losing 100% capital if you’re alert.
No comments:
Post a Comment