A Penny stock is a stock which generally trades at Rs.10/- or less than Rs.10/-. A successful investment in penny stocks generates multibagger returns. The potential for higher returns in penny stocks is what usually attracts to investment in this segment. However, One should also understand the risk associated while investing in penny stocks.
Investing in Penny stocks should be done by investors who have the ability to stomach volatility and has the ability to analyse the stocks. If one is not adept at analyzing stocks then the investor is better off to go with a advisor who can hand hold the investor and guide him.
Investing in the right penny stocks provides an early investment opportunity to investors there by enhancing the opportunity to get multibagger returns. Further people with lower capital can also invest in penny stocks as it is affordable for them.
The first and foremost requirement while deciding to invest in penny stocks to ascertain the Investment goals and the risk the investor is willing to take. The investor must decide how much comfortable they are in investing in penny stocks and depending on their comfort they can allocate money to penny stocks. An investor must diversify his portfolio across Large Caps, Mid Caps and Penny Stocks. Remember the phrase “Don’t put all your eggs in one basket”. Below we discuss some of the key points to remember when we decide to invest in penny stocks.
We need to keep an eye on penny stocks that are listed on the stock exchanges adhere to the regulations of SEBI and the Exchanges.. Any Non Adherence to the regulations is likely to result in loss for the investor.
The investor must develop a screening criteria to zero in on the right penny stocks. It is advisable to use screeners which are available for free to zero in on the right investment. Examine the Company’s financials, key Ratio’s , Industry growth and competitive positioning.
The investor in penny stock must ascertain whether the company is transparent, ethical and adopts a shareholder friendly approach.
Most penny stocks often don’t provide comprehensive information on their financials and don’t disclose adequate information to assess the company’s fundamentals. So an investor must look at whether the company discloses all relevant information for an investor to evaluate the performance o the company.
The investor must ascertain whether the company is conducting concalls every quarter and provides a clear and transparent replies to all queries raised by the analysts and investor community.
The investor must keep updated with all important news on the company and also monitor whether there is change in external environment which will affect the company’s performance.
The investor must keep a close eye on the company’s quarterly performance and assess whether it is in line with market expectations.
The investor must look for key positive triggers in the stock like New product launches, Order Wins in case of companies in the Infra space etc. Some penny stocks operate in a niche segment or sectors which offer a competitive advantage over their peers. Such stocks provides scope for massive capital appreciation.
Penny stocks are very volatile in nature and is susceptible to wild swings in the market due to lower liquidity. There is bound to be undervaluation and over valuation in those stocks. A prudent investor will be able to take advantage of the volatility and make multibagger returns.
Investors in a penny stock must ascertain whether the technology in the industry is susceptible to rapid changes and if so whether the company is competent to adopt to such technological changes.
Investors in a penny stock must ascertain the industry performance and growth opportunities and the headwinds and tailwinds for the industry. The company must also ascertain the end user industry and their outlook for the long term.
In conclusion investing in penny stocks can be rewarding if the investor has adequate knowledge himself or must look for the right advisor who can hand hold him and guide him. The investor must be patient and should always invest for the long term. Apart from that the penny stock investor must know to embrace volatility and take advantage of any steep corrections in the market.
Happy Investing!!!
Team Wealth step Research
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I have got very valid inputs from Diwakar (Financial advisor). He has sound knowledge on financial assets. His advise was very useful to make an informed decision.