What are Penny Stocks in India?

As far as creation of wealth is concerned, the stock markets present a lucrative opportunity. By opening a share trading account, you can trade in the markets and achieve financial success by investing in the right stocks. And typically, when it comes to making money, most people tend to stick to well-established large-cap and mid-caps stocks.

While that is a good strategy, investing in penny stocks can also help you realize your financial goals. With an online trading account, you can invest in penny stocks easily. If you’re wondering what penny stocks are, here’s some much needed information that can help clear things out.

What are penny stocks?

In general, stocks that are priced lower, with low market capitalization, are commonly referred to as penny stocks. In the stock market scenario in India, a stock whose present market value is below Rs. 10 is typically labelled as a penny stock. Owing to the low market capitalization of these shares, penny stocks are not very liquid and are infrequently traded. Due to the low frequency of trading, their prices are subject to sudden and high levels of volatility.

Unlike in the case of stocks belonging to blue-chip companies, predicting the price movement via technical indicators may not always be possible for penny stocks. This is primarily due to narrow bid-ask spreads, sparse price quotes, and the general lack of price history. Nevertheless, penny stocks can present good trading opportunities if you plan your moves right. Once you open a share trading account, you can begin buying or selling penny stocks.

Things you should know about penny stocks

Now that you know what penny stocks are, let’s take a look at some of the key things you should know about these shares before you trade or invest in them using an online trading account.

Penny stocks are perfect for beginners

If you’re a new investor and you’re just getting started with trading in the stock market, penny stocks are typically good bets. They offer a greater level of freedom to experiment, thus allowing you to learn the ins and outs of trading first-hand. Since the price of a penny stock is generally kept low, you don’t have to invest a lot of your capital to start trading in the stock. This also helps keep your losses to a minimum. All you need is a share trading account and some funds to get you started.

Penny stocks can generate high returns

Contrary to popular opinion, not all penny stocks are destined to fail. There are plenty of attractive companies with good financials and growth potential that are being traded for pennies. By identifying these companies accurately and investing in them, you can generate good returns and watch your initial investment grow. However, bear in mind that you might have to hold your investment for a longer period of time in order to get good returns.

Penny stocks do not have an entry barrier

You don’t require much to get yourself started when dealing with penny stocks. The price movement of penny stocks are mostly speculative and do not follow or require methodical technical analysis. This makes them the perfect choice for you if you’re just making your entry into the world of stock market trading. There are no certifications or extensive knowledge in trading required to get started with trading in penny stocks. Since you only require an internet connection and an online trading account, there are absolutely zero entry barriers with penny stocks.

Penny stocks are generally low on liquidity

Since the market capitalization of penny stocks is low, these shares are not very frequently traded in the stock market. Due to the low volumes of trade, it might be challenging to find both prospective buyers or sellers. You can overcome this limitation to a certain extent by holding the shares of penny stocks for the long term. Also, you could adopt a staggered buying or selling approach to accumulate or exit the shares.

Conclusion

While penny stocks can be good investment options for most people, they do carry some risks, just like all kinds of equity. The price movement of such stocks can be unpredictable at times, thereby increasing the risk factor. However, these risks can be mitigated to a certain extent if you make sure to choose the right penny stock before investing.

One way to establish the authenticity and wealth-creating potential of a penny stock is by conducting extensive fundamental and technical research. So, when it comes to investing in penny stocks, it is advisable to refrain from putting too much emphasis on others’ opinions or predictions. Always ensure that you do your own due diligence on the stocks.