As the name implies, Penny stocks are low-priced stocks of small companies with a market capitalization of less than 1000 crore. These stocks are highly speculative in nature due to their price volatility that people arbitrage to gain high profits. Many investors simply put their money in penny stocks with an optimistic hope of becoming multi-baggers. In the quest to find the next big thing, some often end up losing a large amount of their net worth by investing in such stocks. On the contrary, penny stocks also account for several tales of rags to riches of many investors in the stock market.
Why are penny stocks so popular
Different Investors have different reasons for investing in penny stocks. While these stocks have a huge gains potential, they also come with the possibility of wiping away one’s wealth. Hence, for investors in the game of speculation, penny stocks are just a shot in the dark. At the same time, many invest in penny stocks in light of fundamentals and good company financials. Many companies whose stocks earlier traded in nickels, have now risen to fame and are recognised as blue chips.
Is it wise to invest in such stocks
Cases of penny stocks skyrocketing and making people multimillionaires over time have induced a sense of FOMO, especially in the new investors. The same people, dwelling in hopes of quick cash overnight, often end up being victims of pump and dump. Hence, if one wishes to have such stocks in their portfolio, it is vital to pick winning stocks that are growth-oriented. They can prove to be one of your best investments if turned out profitably victorious in the future. One such precedent was Jhunjhunwala’s investment in Titan, which is considered his biggest bet. The stock price of this Tata-held company soared from Rs 3 to Rs 2500 in just 20 years.
How to invest in penny stocks
Since penny stocks bring along a great deal of risk, it is important to understand one’s risk appetite before investing. Invest only what you can afford to lose. Ideally, penny stocks should not account for more than 10% of your investment portfolio. Also, don’t forget to research well about the company and examine its financial statements thoroughly. Last but not the least, keep a tab on how the investments perform from time to time.