Here’s What You Should Know Before Investing In Penny Stocks
Last Updated: February 17, 2023, 18:03 IST
Investing in multiple penny stocks in lower amounts even could be rewarding at times.
Due to the low market capitalisation and low liquidity of penny stock companies, it could be subject to easy price manipulation.
You may have often come across the jargon penny stocks in discussions about the stock market. Basically, penny stocks are those shares which trade at a low price on the stock exchanges. Generally penny stocks come at a value of below Rs 10 per share. Penny stocks usually have a low market capitalisation.
Due to their comparatively lower price, investors see penny stocks as an instrument to make quick money. Investing in multiple penny stocks in lower amounts even could be rewarding at times.
However, in a haste to make some quick bucks, one can easily make some erroneous decisions while investing in penny stocks. According to experts, companies that have a market capitalisation of less than Rs 500 crore are often more prone to market volatility and stability could be a major issue with such companies. These are not big companies or highly reputed brands in their respective industries. So it could be difficult to track their progress or performance.
Here are a few things you need to keep in mind while investing in penny stocks.
Manipulation of share price
The shares available for trading in the market are limited for small companies. Due to the low market cap and low liquidity of penny stock companies, they are subject to easy price manipulation. As an investor you should not be lured by the sudden rise or fall in price of these penny stocks.
Research on company
Although finding information on small companies can be tough, buy stocks only after researching the future growth prospects, product, performance and background of the company. It is recommended to go through the balance sheet and the financial statements of such companies before choosing a penny stock to invest.
Don’t invest large amounts
An investment in penny stocks carries a significant amount of risk. These shares have the potential to spike at any time, but stability could be a major problem. They never move in tandem with important sectors or indices. Do not invest a lot of money in one penny stock to secure yourself against unexpected price fluctuation.
Exit if you make profit
For the same reason as stated above, it is recommended to exit as soon as you have made a profit. Sell the shares as soon as the prices go up and exit the stock with good returns.
Be wary of insider trading
Insider trading is more likely as a result of these companies’ decreased or incomplete information sharing with investors. Retail investors are easily manipulated by promoters or other institutional investors. When the insiders or significant stakeholders in such companies sell their shares, it could be an indication about the financial health or the future prospect of the company. So, it’s better to always remain watchful about insider trading in such stocks.
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