Penny stocks are low priced stocks with low market capitalization. Their prices are subject to a high level of volatility rate. These are also called “small-cap stocks” “nano-cap stocks,” “micro-cap stocks,” depending on the company’s market capitalization. Sometimes it’s not possible to predict the price of penny stocks like regular blue-chip companies stocks.
Pricing of Penny Stocks
In the Indian market prices of penny stocks are less than Rs. 10 on the other hand in the Western stock markets shares are traded below $5. Penny stocks can be released by a company with a market capitalization of less than Rs. 5,000 crores.
Formula to calculate the company’s market capitalization rate:
NAV of share (Net Asset Value) X Number of stock’s outstanding
Classification of Market Capitalization Rate
|Company||Market Capitalization Rate|
|Large-cap companies||Rs 20,000 crores or more|
|Mid-cap companies||Rs 5,000 crores to 20,000 crores|
|Small-cap companies||Less than 5,000 crores|
Key Points about Penny Stocks Investment
- The High Rate of Interest: In comparison to other forms of securities, penny stocks delivers a higher rate of interest.
- Penny Stocks Can Be Risky: They are irregular and unpredictable. At times, they can go up with a peak and may fall with the same intensity. However, there are times when the change in the cost of the stocks is very less. Risk can be reduced by following one trading system throughout.
Illustration: “A” invests Rs. 10,000 in penny stocks of XYZ Ltd. A single unit costs Rs.10. value of stock increases and costs Rs. 100. “A” sells his 1,000 stocks at Rs. 1, 00,000. This specific stock is considered to be a ten-bagger.
- Illiquid Stocks: Due to limited trading and unpopularity, inventors face a problem in finding purchasers, and thus they are not so common.
- Low Cost: Due to the low price of the stocks (priced less than Rs 10), people can buy a large number of shares with small investments.
- A good Option for Beginner Investors: Penny stocks can be a good option for a person to learn trading without paying brokerage. A person can invest a small amount and prevent a huge loss. There is no major hurdle for beginners to start investing in penny stocks, all one needs is an online trading account.
- Information is Limited: It is difficult to conduct proper research before investing in a penny stock as such companies are start-ups, only limited information is available and there are no such records to check its graph. An investor must invest only after checking thoroughly from all possible sources.
- Prone to Scams: It is clear from financial history that there are many cases of scams in penny stocks. One scam mode is “Pump and Dump”. Scammers buy a large sum of stocks that results in attracting many investors, once the value rises, the scammer sells the share and gains profit resulting in a sudden downfall of the value of the share.
- Demat Account: To invest and buy any kind of shares, one needs to have a trading account and Demat account.
- Stock Market Research: It is very essential to research stocks before investing in the share market and even if you are investing in penny stocks. Avoid taking investment advice from friends and relatives to do your research and study.
Universal Rule for Investment in Stocks
Penny stocks can be a good option for investment, but one must know that these stocks carry high risk as the prices are unpredictable. So, it is very necessary to invest in the right penny stock. Before investing, one must assess the stock’s value thoroughly. It is necessary to focus on the real value of the share rather than the share price at that time. In other words one must not just buy some shares as they cost less at that time, rather a person should check the usual range of a particular share and then invest.