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What are Penny Stocks in India
Penny Stocks: All You Need to Know
New investors, especially small ones, are always looking for investment options that allow them to create long-term wealth without investing more capital. Penny stocks, owing to their low price, thus are an easy option for new traders aiming for huge investment gains. Investing in these stocks is almost risk-free, which is why they are extremely popular among new and small traders.
Such stocks can be extremely profitable in the short run because they are highly volatile. In addition, buying these stocks ensures that investors gain an assurance of regular dividends and capital gains. The gains received by investors range from 300% to 500% or even higher. Even investors making a small investment of INR 100 can still enjoy profits up to INR 500.
Read on to explore more about penny stocks, their types, and their basic features so that new or small investors can decide whether these stocks are ideal for them.
What are Penny Stocks in India?
Penny stocks are stocks of small-cap companies listed on stock exchanges for a value lesser than Rs. 10. These stocks are not frequently traded as stocks and are prone to market volatility. While these stocks offer exceptional returns compared to shares and mutual funds, they can be relatively risky. For example, an investor may buy these stocks at a very low price, but they might need help finding buyers when wishing to sell them.
Types of Penny Stocks
Penny stocks in India are one of the popular types of investment, especially among new and small traders. They make one of the inexpensive investment options as they have minimal trading volume. Two popular lists of such stocks are provided below.
Multibagger Penny Stocks
Multibagger stocks are similar to regular penny stocks. The significant difference between the two, however, is that the price of the former tends to rise every once in a while during the time of investment.
For example, if a new investor invests in a multibagger stock priced at INR 20 and the price rises to INR 30, the stock is called a two-bagger. Likewise, if the price increases by INR 40, the stock is then known as a three-bagger, and so on. When the stock price rises, the profit margin also continues to increase, known as multibagger stocks. In investment terminology, there is no standard definition for multibagger stocks.
However, investors should be aware that a stock is known to be a multibagger when the stock can provide 100% or more returns in a short duration. In simpler terms, when the stock becomes 2X or 3X its original price.
Debt-Free Penny Stocks
Debt-free penny stocks are also known as zero-debt stocks. These stocks are the shares of small-scale companies that usually trade at minimal prices and are illiquid. Since these stocks are shares of small-cap companies, they are also sometimes referred to as nano-cap stocks or micro-cap stocks. These debt-free stocks are highly crucial, especially when it comes to diversification in a volatile market. Nonetheless, these stocks are known to be profitable in the long run.
Advantages of Investing in Penny Stocks
There are various key features of penny stocks that separate such stocks from other types of stocks in India, such as high return potential, low cost, limited background checks, etc. These features are why investing in these stocks will always be advantageous for investors. Here are some major factors contributing to the benefits of investing in these stocks.
High Gains at a Faster Pace
Receiving high investment returns can be somewhat of a long journey for investors. However, penny stocks often encounter rapid price movement, producing higher gains faster.
Exciting Investment Journey
Unlike other investment options, these stocks move rapidly, allowing investors to reach the adrenaline rush that comes with making profits and losses in trading experience. The value of such stocks tends to go up as fast as they go down. When the stock prices go down, it is a sign that the company is not performing economically well, and investors need to cash out their investment soon.
A Minimal Sum Can Turn Into Higher Sums
These kinds of stocks allow investors to begin their trading journey with a small amount, which can begin as low as INR 100. It means an investor can easily buy thousands of such stock shares in the same amount needed to purchase three-four shares of blue-chip companies.
Fewer Associated Regulations
Penny stocks carry fewer regulations. Paperwork and background searches of the buyer involved with such stocks are relatively lesser than other stocks, such as mutual funds. It allows investors to have a less-complicated buying experience. However, this can also turn into one of the cons of investing in such stocks.
Things to Consider Before Investing in Penny Stocks
While new or small traders can use such stocks to make high investment returns, penny stocks are relatively speculative. Factors such as high risks, buying and holding, and others must be considered beforehand. Here, we list some factors that investors must consider before investing.
- The prices of these stocks are tough to predict, so they can quickly go up and down a lot. This is because the worth of each share is very low. However, such stocks have the potential to provide big investment returns.
- Opting for something other than the buying-and-holding approach for such stocks is highly recommended. Instead, investors should invest in these stocks for a shorter period and let them mature before making investments again.
- Such stocks offer exceptional returns compared to other investment options, such as equity shares and mutual funds.
- These stocks are vulnerable to sudden drops in value owing to highly volatile market conditions. Thus, investors should wisely invest when choosing these stocks as investment options.
- Investors should never view such types of stocks as their long-term investment strategy. These stocks are more favourable for short-term gains.
Frequently Asked Questions (FAQs)
How can I find penny stocks in India?
Various companies provide such stocks to new and seasoned investors. That is why investors should engage in extensive research of the company one is investing in to avoid risks. Investors can try paper trading, a technique simulating the trading experience without investing real money.
What are some benefits and risks of investing in penny stocks?
Penny stocks offer a range of benefits to their investors. One of the major advantages of investing in such stocks is that they require minimal investment to gain higher returns. However, the value of these stocks can be more volatile than other investment options, such as mutual funds and shares. Moreover, there is low assurance that investors will receive high returns on their investments.
Do banks provide options for investing in penny stocks?
Yes, many public and private banks are engaged in the banking business. Some popular banks where investors can invest in these types of stocks are Jammu & Kashmir Bank Limited, Indian overseas bank, Bank of Maharashtra Ltd, etc.