What Are Penny Stocks? And Should You Invest in Them?

“If you invested in ABC shares 20 years ago, you’d be a millionaire now.” How often have you heard this and wished you knew the potential of certain stocks to make the right investment today? 

Well, all these stocks had been trading in pennies before their prices skyrocketed because of changes in the market. And although not all penny stocks blow up, many investors are willing to bet on the prospects. If you’re wondering what penny stocks are and if they’re worth investing in, you’re at the right place. Let’s break it down to find the answer.

What are penny stocks?

In India, penny stocks are stocks of companies that have a low market capitalisation and are traded at very low prices. Based on the market capitalisation, these stocks are also called micro-cap, nano-cap, and small-cap stocks. The price of Indian penny stocks ranges between Rs. 0.01 and Rs. 10. 

These stocks are highly volatile as they are traded in low volumes and provide low liquidity. Indian penny stocks are mostly listed on smaller exchanges, and it’s almost impossible to forecast their price movements.

Pros of penny stocks investment

Now that you know what penny stocks are, let’s look at the benefits of investing in them.

• Inexpensive

As penny stocks are traded below Rs. 10, you won’t have to make a significant investment, especially if you’re a beginner. When you invest in a blue-chip stock, you must shell out a lot of money to purchase a huge volume. But with penny shares, you can invest in a huge volume at a fraction of the cost.

• High returns

Most new and small businesses usually start by issuing penny shares. When you invest in these companies before they become successful, you can enjoy massive returns. If you research in-depth about the company and its finances, you can make huge profits. But to fully realise the potential of the stock, you must stay invested for the long term.

• Possibility to make profits overnight

If the company you invested in suddenly hits the limelight for good reasons, your penny stock investment can grow overnight. For example, GameStop, a penny stock in the US market, traded between $2 and $3. However, after a random discussion over a Reddit thread, its price shot up to $300 in early 2021.

Cons of penny stocks investment

Although not all penny shares fail, they have several risks associated with them. Let’s dive into them to help you make informed decisions.

• Inconsistent pricing

While you can make overnight profits with penny shares, it can also go the other way round. Additionally, a lack of information about these shares increases the chances of fraudulent activities. Therefore, forecasting the prices of these stocks becomes challenging. Even stocks of companies that have a high market capitalisation can be extremely volatile.

• Low liquidity

As penny shares are stocks of small companies, they are not very popular in the market. As a result, they have low trading volumes, making it difficult for you to buy or sell stocks. If you’re in urgent requirement of funds and want to sell your penny shares, you might not always find a buyer easily.

• Insufficient information

It is crucial to research the company and its finances thoroughly before investing. However, finding the right information about their finances, management, and performance can be tricky with small companies. And with limited information, it’s challenging to make an informed decision.

Should you invest in Indian penny stocks?

Investing in penny shares can often be a gamble. Therefore, you should only invest a small percentage of your portfolio value in these stocks. Even if the prices of these stocks increase, they have low liquidity. This means that there are chances you won’t be able to take out the money in time to enjoy the benefits. 

However, all penny shares have different features, and several stocks are stronger than others. So, carefully perform fundamental research along with technical analysis before making any investment. Also, don’t forget to monitor the trading volumes.

The bottom line

Penny shares can be an excellent investment as they have no entry barriers and require little to no formalities to trade. All you need is a stable internet connection and a trading account. Moreover, as they are low priced, you can begin your investment journey without burdening your pocket. But remember, not all penny shares make it big. So, carefully research the fundamentals before investing in them.

If you want to invest in the stock market but don’t have time to research and analyse stocks, mutual funds are the ideal choice for you. With Tata Capital’s Moneyfy app, you can start investing in India’s top-rated mutual funds in just a few clicks! The user-friendly interface and inbuilt goal-based investment tools allow you to create and manage your portfolio seamlessly. Download the app today and make your money grow!