Penny stocks are equities in small, low-priced companies and are very risk-intensive investments. Such companies usually have less financial stability and visibility in the market compared to big firms. The volatile nature of penny stocks is particularly high because of their low price as their value can change rapidly in a very short space of time, hence giving chances of either high wins or losses. These often attract investors who seek a large number of shares at a low price.

What are Penny Stocks? 

Penny stocks are relatively associated with small firms and tend to be low in liquidity. That is to say that there are fewer buyers in the market, hence it would be easy for an investor to struggle to sell their shares, given that there might be no demand for them at prices that can correctly reflect the real market conditions. As one might expect, penny stocks are even more volatile, meaning huge potential rewards with even higher risk. Investors may lose all the money they pumped into these stocks.

Wondering which penny stocks to buy today? To get a complete penny stocks list on NSE, you may ring your broker or check stock exchange websites, financial websites, and applications. You may also check the list of penny stocks in India on BlinkX to buy in 2024.

Features of Penny Stocks

The features of penny stocks are as follows:

Returns

When it comes to returns, many people think penny stocks can make you a lot of money quickly because they are so reasonable. While it is true that their low prices could lead to high returns, however, there is no guarantee they will. Investing in these stocks is risky because you often do not have enough information to predict which ones will succeed. 

Multibagger

Multibagger penny stocks are low-priced shares that significantly increase in value, often multiplying several times over their original price. Investors look for these stocks because they can deliver substantial returns if the company grows or improves. However, identifying potential multi-baggers is risky, as many penny stocks may not succeed. Due diligence and research are crucial before investing in these opportunities.

For example:-
Mr. ABC invested ₹5,000 in penny stocks of XYZ Ltd, a start-up, where each share cost ₹5. By the end of the financial year 2023-2024, the stock price rose to ₹50. Mr. ABC sold his 1,000 shares for ₹50,000, making a tenfold profit. This stock is called a ten-bagger because it increased ten times in value.

Illiquid

Penny stocks are considered illiquid because they are traded in low volumes, making it difficult to buy or sell them quickly. This lack of activity can lead to larger price swings when trades do occur. As a result, investors may struggle to find buyers or sellers at desired prices.

Unpredictable Pricing

Penny stocks might not sell for a good price, which could lead to low or no profits. On the other hand, they could also be sold for more than what you paid, giving you a big profit.

Pros and Cons of Penny Stocks

Advantages:

Low Cost of Entry: Investors can buy large quantities of stocks for a small amount of money, making them accessible to more investors.

High Potential Returns: Due to their low prices, even a small increase in value can result in significant percentage gains.

Market Inefficiencies: Some penny stocks may be undervalued, presenting opportunities for savvy investors to identify hidden gems.

Liquidity Potential: Some penny stocks can see high trading volumes, providing opportunities for quick buying and selling. 

Disadvantages:

High Volatility: Penny stocks are often subject to significant price fluctuations, which can lead to substantial losses.

Low Liquidity: Some penny stocks can have low trading volumes, making it difficult to buy or sell shares without affecting the price.

Fraud Risks: The penny stock market is more susceptible to scams and pump-and-dump schemes, where stock prices are artificially inflated before being sold off.

Limited Growth Potential: Many penny stocks represent struggling companies, which may not have the capacity to grow or turn a profit.

Please note that investors should carefully weigh these factors and conduct thorough research before investing in penny stocks.

Tips for Investing in Penny Stocks?

Investing in penny stocks can be enticing due to their low prices and potential for high returns, but they also come with significant risks. Here are some tips to consider:

Research: Investigate the company’s fundamentals. Look into their financial health, management team, and market potential.

Understand the Risks: Penny stocks are often highly volatile and can be subject to manipulation. Be prepared for potential losses.

Set a Budget: Only invest money you can afford to lose. Given their speculative nature, it’s wise to limit your exposure.

Diversify Your Portfolio: Do not put all your money into one or two penny stocks. Spread your investments to mitigate risk.

Watch for Volume: Look for stocks with higher trading volumes, as this can indicate better liquidity and less price manipulation.

Be Cautious of Promoters: Avoid stocks that are heavily promoted or hyped, as these can be signs of fraudulent schemes.

Use Limit Orders: Consider using limit orders rather than market orders to control the price you pay and avoid unexpected fluctuations.

Stay Updated: Keep an eye on news related to your investments and the broader market. Events can significantly impact penny stock prices.

Have an Exit Strategy: Know when to sell, whether to take profits or cut losses. Establishing clear goals can help guide your decisions.

Consider the Long Term: While some investors may seek quick gains, holding onto quality penny stocks for the long term can sometimes yield better results.

How is a Penny Stock Created?

Penny stocks are typically created through the following steps:

Company Formation: A small company is established, often with limited resources. This can be a startup or a business looking to expand.

Initial Funding: The Company seeks initial funding, often through private investors, venture capital, or small public offerings.

Going Public: To trade on the stock market, the company may decide to go public, often through a process called a reverse merger or a direct listing, particularly if they want to avoid the lengthy process of an initial public offering (IPO).

Low Stock Price: Once the company is public, its shares are sold at a low price, typically under ₹5, which qualifies them as penny stocks. This can happen due to the company’s size, market capitalization, or perceived risk.

Market Trading: The shares are then traded on over-the-counter (OTC) markets or smaller exchanges.

Regulatory Requirements: Penny stocks are subject to different regulatory requirements than larger companies, often leading to less oversight, which can increase volatility and risk.