Penny Stocks: 2023 Guide On Meaning, Features, Risks and More (2024)

Last Updated on Oct 3, 2023 by Anjali Chourasiya

What are penny stocks?

Shares with current market prices ranging from Rs 0.05 to Rs 10 are tagged as penny stocks in India. Such stocks also have low market capitalisation—typically less than Rs. 500 cr. That’s why penny stocks are traded infrequently, which makes them highly volatile and illiquid investments.

Salient features of penny stocks

Penny stocks have more to them than just low prices and market cap. Below are some of the salient features of penny stocks to give you a better understanding of these avenues and whether they are fit for your investment portfolio.

Penny stocks are good bets for beginners

Penny stocks are priced low, making them attractive avenues for beginners in stock investing. With no experience and thorough knowledge of the stock market, a new investor would find investing in penny stocks affordable and easy to experiment with.

Some penny stocks yield high returns

Penny stocks are generally issued by smallcap companies, small businesses, and startups. Such businesses are young and fairly new in the industry and stock markets, which gives them a huge potential to grow. If penny stocks unleash their growth potential, they can become profitable over time and generate handsome returns. Read more about market capitalisation and smallcap companies here.

Penny stocks can be risky

As is known, along with high returns comes high risk. Since small-cap companies and startups mostly issue penny stocks, they can be risky avenues. This is because, although small-cap stocks have the potential to grow, they have fewer financial resources and smaller balance sheets. A key takeaway here is that you may have to hold penny stocks for a long time to optimise your returns (minimise risk and maximise returns).

Penny stocks with strong fundamentals can be good investments

Although small-cap companies are risky businesses, those with strong fundamentals, management, financials, and prospects can become profitable over time. So, when scouring for penny stocks in India, don’t just look at the financial statements at their face value, try to gauge their quality as well.

Penny stocks are generally illiquid

High volatility and low market capitalisation of penny stocks attract less investors. Further, since these are traded less frequently, penny stocks are illiquid. This means matching buyers of penny stocks when you need to liquidate your holdings may be challenging. Ergo, you may refrain from investing your emergency funds in penny stocks.

Penny stocks have limited information

Since penny stocks are mostly issued by smallcap companies and startups, you may not get enough information about the business—stability, historical data, prospects—to make sound investment decisions. Ergo, you should only invest in penny stocks if you can access vital information about the company.

Prices of penny stocks can be manipulated

Given that penny stocks as traded in low volume, there is a risk of brokers and promoters manipulating their prices. As with any other share, penny stocks also have upper and lower circuits. Ergo, if a stock is locked in the upper or the lower circuit for a long time without corresponding news, then chances are that the stock price is being manipulated. That’s why it is best to confirm the driver of extreme trends in the price of a penny stock before transacting it.

Pros and cons of investing in penny stocks

Investing in penny stocks has advantages as well as risks associated with it. Before you make an investment in penny stocks, it is worthwhile to take a look at the pros and cons.

Advantages of penny stocks

• Low cost: Penny stocks trade at a lower price, which makes them accessible to investors with low capital. They can buy a comparatively higher number of shares in penny stocks than they might get in blue-chip stocks.
• High returns: Penny stocks, often issued by new or small-cap companies, hold substantial growth potential. This can directly impact their stock prices, making them capable of delivering higher returns than more established securities.
• Chances of overnight gains: Since penny stocks are associated with small companies that are yet to reach their full potential, there’s a chance for rapid price surges. If a penny stock company suddenly gains positive attention due to factors like strong fundamentals, good management, or market positioning, it might experience significant overnight gains in stock prices.
• High chances of capital appreciation: Penny stocks, originating from smaller or newer companies, often have the potential for significant capital appreciation. If the company experiences growth or gains popularity, the stock’s value can appreciate considerably, leading to potential profits for investors.

Disadvantages of penny stocks

• Prone to scams: Penny stocks have been a very common element in the history of scams. Pump and Dump strategy is one of the common scams associated with penny stocks. In this, the companies and groups of investors buy a considerable amount of shares in order to manipulate the price and make profits at the expense of naive investors.
• Limited information: As penny stocks are either start-ups or at an early growing stage, it is difficult to gather information about the company’s history and financial performance. Hence, the chances of investing in a company with less growth prospects are high in penny stocks. It is always worthwhile to research the company thoroughly before investing.
• Low liquidity: Penny stocks usually have a low trading volume, which can make it difficult for investors to buy or sell them as easily as blue-chip stocks. In the case of emergencies, it can be difficult for you to find buyers and liquidate your investment.
• Unpredictable pricing: Forecasting the price and trend of penny stock can be difficult, owing to its scarcity of data, irregular trading patterns, and the scope of fraudulent activities. Price ranges in penny stocks tend to be less stable than well-established blue-chip stocks. While an investor might witness substantial gains in a short span, the reverse can also occur swiftly, leading to losses. Even the most prominent penny stocks with sizable market capitalisation can fluctuate drastically.

How do penny stocks work?

Penny stocks work like every other stock on the stock exchanges, but given their affordability, penny stocks serve as an entry point for novice traders to gain hands-on experience in the stock market. They are capable of generating high returns. Gains of 400%, 500% or even more are possible.

However, due to their low liquidity, you might not be able to sell it at the right time. It’s also important to note that not all penny stocks lead to substantial gains. Some may fade out and eventually be delisted, resulting in losses for investors. Therefore, while the potential for high returns exists, it’s not guaranteed.

Investors should conduct thorough research and strive for a diversified investment portfolio to manage the risk linked with penny stocks. This approach helps offset the potentially higher returns from penny stocks with more secure investments. You can check the diversification of your portfolio using the Tickertape Portfolio. Explore now!

Who can invest in penny stocks?

There are no special requirements for investing in penny stocks. You can buy or sell them on a stock exchange—if they are listed—like you do with any other stock. Nonetheless, you can look if you fit into one of the following categories of investors looking to bat on penny stocks:

• You are a beginner and want to experiment with stock investing.
• You have a low capital budget.
• You are willing to assume high risk.
• You are willing to stay invested for the long term.
• You are looking to invest in multibagger penny stocks—those that generate returns higher than the investment amount.

3 important questions to ask before investing in penny stocks

Asking meaningful questions like these also helps in making better investment decisions:

– Are the company’s statements audited well?

– Does the company disclose required information to market regulators and investors on time?

– Do the management’s words or plans match their actions and results?

How to find penny stocks?

Now that you understand such stocks better, you may be eager to invest in penny stocks in India. If yes, start by filtering these on Tickertape. Here’s how you can do it.

1. Launch Tickertape Stock Screener.
2. Under the left-hand side, set the market cap from 0 to 10 or 50 or your desired level.
3. The screener returns the list of penny stocks listed in NSE.

There are over 200 filters to choose from. Based on the criteria you want to apply, select the filters. In case you are not able to find the filters, you can create one using the ‘Custom Filter’ option. We’ve created a few articles on penny stocks based on certain criteria. Here is a quick list for you.

1. Penny Stocks Below Rs. 10 – Based on Fundamental Factors
2. Best Penny Stocks Below 1 Rupee – Based on Fundamental Factors
3. Best Fundamentally Strong Penny Stocks (2023)
4. All Pharma Penny Stocks in India: Pharma Shares Below Rs. 50
5. Best Stocks Under Rs. 20 in India (2023)
6. 50 Stocks Under 50 Rupees – Complete Guide
7. Best Stocks Under Rs. 100 in India (2023)

Conclusion

Like any other equity shares, penny stocks are also risky and unpredictable. Thus, the best course of action is to pick fundamentally strong penny stocks, hold them for the long term, and monitor your investments.

Again, every investor has different financial goals, risk appetite, and return expectations. Therefore, evaluating your terms and doing your due diligence before investing in penny stocks instead of relying solely on what others say is prudent.

FAQs about penny stocks

Should I invest in penny stocks?

Penny stocks have pros such as low cost, chances of capital appreciation, and high returns. However, there are various risks associated with penny stocks, such as they are prone to scams, illiquid, and have limited information and unpredictable pricing. Therefore, if you have a positive outlook on the stock’s future performance, you may consider investing in it at your own risk. It is always worthwhile to consult a financial advisor before taking any decision and blocking your investment capital.

Are penny stocks risky?

Penny stocks are low-priced with a high risk associated with them. This is mainly due to the limited information available about them and low trading volumes. Penny stocks are also prone to scams.