Penny stocks as the name suggest are stocks which are trading at the very low price on the stock market. From Indian market perspective, stock trading in the range of 0.05 to Rs 5, are generally referred to penny stocks. Almost 25% of BSE and 10% of NSE stock are penny stock and some of them are not traded at all on the exchanges.
Someone new to stock investing assumes that these are cheap stock to buy and there is not much downside possible as they are already trading so low. But it is not the right way to look at it, even if a stock is trading at Rs 1, it can fall further to 50 paisa wiping 50% of your capital. Dabbling in these stocks is risky until you are very sure of what you are doing.
Reason why Penny Stocks are cheap
There could be multiple reasons for a stock becoming a Penny stock some of the main once are
- Company is in loss and little hope of it turning around
- Promoters are dubious and not competent to run the companies
- Low trust of street on their business
In 1990, listing of the companies was very easy compared to now, because of which lots of questionable companies were able to list their companies on the exchange. Most of these companies never have a proper business to run nor were their promoters actually interested in running it.
Is it safe to trade in Penny Stocks?
If you are trading using your brokers and not trading over the counter(OTC), it is safe as far as the delivery of stocks are concerned. But most of the time, when you see huge gains in these stocks, there is a promoter operator nexus. The price is run to a high level and some of retail investor also buys in the hype. Price increase and once the price have increased to a level where the nexus want it to reach; they dump all the stocks, leaving retail investor high and dry.
In some cases, there have been real turnaround stories of Penny stocks where investor have made 10 or even 100 times return on their investment, but they are few and far between. Most of the investor dabbling in Penny stock ends up losing money in them.
Also liquidity is an issue in most of the Penny stock. So it is very possible that when you want to sell your stocks, you will not find many buyers for the same in the market.
LIST of Penny Stocks
Below you will find the list of penny stocks which were traded on NSE on 8 Sep. This list was made from the bhavcopy and consists of all the stock which traded in between .05 to 5 Rs. To find the latest list, you can go to Nseindia.com and copy the latest Bhavcopy from there.
Why Penny stocks are not cheap buy
Some investors think that penny stocks are very cheap to buy. This is a myth which I will try to explain with an example. Say a penny stock is trading at Rs 2 and another stock is trading at Rs 100. Which is a cheaper stock?
Most of you will say that Rs 2 is a cheaper stock which is right but my next question is which has more value. If you still say that Rs 2 has more value, then you probably are wrong.
The price of the stock are explained by Price to earnings ratio(P/E) . What it means is if the stock is earning Rs 4 per stock and the price of the stock is 100, the P/E is 25. In above example, Rs 100 stock is earning 4 per share while Penny stock is in a loss or not earning anything per stock. What is means is P/E for Rs 100 stock is 25 while the P/E of penny stock is 2/0 or undefined or very high.
This example shows that Penny stock are very expensive in term of value you are getting from the stock.
Another misconception investor have is if they have Rs 10,000 to invest, they can get 5000 penny stocks compared to 100 stock of good company. This is a totally wrong way to look at investing, as even if the price of good stock increase by Rs 10 per share, your earn 10% on total investment irrespective of the number of share. While if the price of Penny stock fall by 10%, you lose 10% of your investment corpus. Number of share by itself has little meaning.
Should you invest in Penny Stock?
I am not a stock advisor and could not advise on buying or selling stocks but I will just say that rather than gambling on Penny stock, it would be worth your while to invest in companies which have good businesses and solid books. There could be some volatility which you can see even if you invest in blue chip companies but in the long run, they will beat the returns generated from Penny stocks.
In case you are new to stock market or are not happy with the brokerage you are paying, see our article on cheapest stock brokers in India
If you have any other question and concern about Penny stocks, ask the questions below and I will try to help you.