“Penny Stocks”
does it ring a bell? It must be familiar by now if you have watched the movie “The
Wolf of Wall street” wherein the
Leonardo makes windfall gain by selling penny stocks to his customers. So what
exactly is a penny stock? Any stock which trades at a very low price, usually
below Rs 10 or even stocks issued by a company which has a market capitalization
of less than INR 100crore. This term
coined in the U. S was used for stocks below $5.
Nearly about 25
% and 10% of the stocks listed in Bombay stock Exchange and National Stock
Exchange trade below Rs 10. Such stocks do attract a lot of investors with the
prospect of making supernormal gains over a short period of time. Penny stocks though risky, can become multi
–baggers by rising from say 10 to 100 in less than a year, whereas a defensive
stock like ITC (FMCG category) will find it difficult to appreciate 10 times
from the current price of Rs 350. The risk-reward ratio is high in such
companies as there is limited information about the functioning or the
promoters of such companies. The price of these stocks is not relevant. One
must look at the company’s potential and the quality of the management team.
So now, how we identify
such stocks, is the quintessential question in your mind. You could use the
following check list.
- Know why the stock became penny in the first place.
- Consider the stocks owned by a bigger parent group.
- Look for the companies with high promoter stake.
- Watch out for the debt of the company.
- The company should not have too many subsidiaries and must have a good sales growth and high institutional shareholding.
I would not be giving out the companies name in this blog which you can consider to invest. I would advise you to study companies in detail. You may consider investing in companies which are undervalued due to reasons not inherent to the company’s performance. Final advise, don’t buy penny stocks in haste, do proper screening and always try to buy at the least 4 to 5 stocks( as few might underperform) to mitigate risk if there is any downslide.
