US A definition of penny stock in the U.S. is a stock that trades for less than US$5 per share. But there is no such classification in the Indian context.
Many mention stock trading below 50 as penny stock. Others consider stocks that have less 100 share price. Some even consider the stock below 10.
Let’s take a look at the total number of penny stocks in the Indian stock market as on 14 December 2021.
Number of shares trading at or below 100
From the total listed companies, the number of shares which are active and trading at or below There are 100 844 on 14th December 2021.
Of course, this number can change every day as stock prices move up or down.
Out of 844, the top two positions in terms of market cap are held by IDBI Bank and Bank of Baroda.
This list is followed by Vodafone Idea, PNB and Indian Overseas Bank.
Number of shares trading below or at 50
Total number of shares trading below or at On 14th December 2021 50 is 605.
The top three positions in terms of market cap are held by Vodafone Idea, PNB and Indian Overseas Bank. After this the number of Yes Bank, Union Bank of India and NHPC comes.
420 out of 605 shares traded down 25.
Number of shares trading below or at 10
As of December 14, 2021, there are only 230 stocks that trade at or below 10.
Here, the top position in terms of market cap is held by Suzlon Energy and Jaiprakash Power Ventures. It is followed by Ratanindia Power, GTL Infra and The South Indian Bank.
Should you buy penny stocks for investment or speculation?
The answer is pretty obvious, isn’t it?
It goes without saying that you should buy penny stocks from an investment perspective.
What if the penny stock in question is a high growth company and promises to make big profits in the future?
However, your perception should be of investment and not of speculation.
Not just penny stocks, first and foremost rules of investment Either way it is that your principal amount should be safe. There should be minimum risk of fall.
Benjamin Graham attached significant importance to this concept. In fact, he has started his book The Intelligent Investor with this subject.
In his own words:
An investment operation is one which, when thoroughly analysed, promises protection of principal and substantial returns. Operations not meeting these requirements are speculative.
Therefore, before investing in penny stocks, it is highly recommended to do a thorough analysis of the facts and fundamentals so that your investment can be protected from losses in most of the circumstances.
Investment legend Warren Buffett was once asked this curious question in an interview: ‘Aren’t speculation and investing the same thing’?
‘Definitely not’ The answer came.
Since speculation is common in penny stocks, many investors are attracted to them because of this.
If you are making a speculative bet (even if it is not fair), you must have a strong definite reason to support it.
This is because speculation is not for the faint hearted…Your entire capital could be destroyed.
Should You Buy Growth Penny Stocks or Value Penny Stocks?
Let’s go one by one.
Growth stocks are those that grow sales and profitability faster than the market average.
On the other hand, value stocks are those which provide value at their present value, i.e. they are undervalued.
Although value investing has been around a long time, many analysts are arguing that it is dying. The world is a different place now with internet companies offering growth.
an article from Hindu Back in 2019 said value stocks have historically outperformed. It argued that over the past 19 years, the MSCI India Value Index has outperformed.
Does this mean that value stocks tend to lag all the time? No. The article further argues that in a bull market, growth stocks outperform value stocks.
However, value stocks tend to lose better in bear markets than growth stocks. Therefore, if there is a strong correction in the market, you will want to stay in value stocks.
It’s confusing to choose between the two, isn’t it? This is because both have their advantages and disadvantages.
But there is a solution.
You can take exposure to both value and growth penny stocks and then vary the allocation based on relative underperformance and outperformance.
Another option would be to ignore this classification altogether and go with Warren Buffett on the subject.
Here’s what Buffett once said about growth and value stocks:
‘Development is always a factor in the calculation of value, constituting a variable whose importance can range from negligible to enormous and whose effect can be negative and positive’.
So instead of separating stocks on the basis of growth and value, always treat growth as a component of value and not as a separate entity.
How Much Should You Invest in Your Penny Stock Portfolio?
Penny stocks are inherently riskier than bluechip or midcap stocks.
On the bright side, they offer a huge growth potential. It’s not unusual for a good penny stock to turn into a multibagger in a matter of months.
On the other hand, there is a high risk associated with them. Not all penny stocks are outperformers. In fact, there have been instances where penny stocks have fallen 80-90% when things turned sour.
This is why penny stocks are not recommended for low-risk people.
If you have a slightly higher risk appetite, it is recommended that no more than 5%-7% of one’s portfolio should be invested in penny stocks.
This means that the corpus set aside for a penny stock should not exceed 5%-7% of the total funds allocated for equity.
What is the right penny stock strategy?
Investors are often lured into penny stocks, hoping to earn a quick and large sum of money.
But little do they know that with low liquidity and limited information, penny stocks are the riskiest investments.
While some penny stocks can grow decently in value, many of them never see a profit.
Since all investments come with risk, diversifying your portfolio with penny stocks is a good strategy. Chasing only the safest bluechip is going to yield only one thing: diminishing returns.
And that’s where penny stocks come in.
But here is the crux. There are about 1,000 penny stocks vying for our attention.
If you don’t know how to say no to more than 90% of them, you’ll end up with a lot of junk.
To differentiate men from boys in the penny stock universe, you need a strong framework.
A framework that not only enables you to zero in on the right penny stock at the right price but also helps you avoid those big losses.
Fortunately, the co-head of research at Equitymaster once has such a framework in place. it goes by the name ‘Solid Framework’,
In a nutshell, here’s what the different components of SOLID mean:
S – Strong Balance Sheet
O – Owner Operators
L – Long term business viability
I – Income Generation
D – Deeply Discounted Valuation
This framework eliminates most junk penny stocks and lets only the most fundamentally strong and most attractively priced penny stocks through.
Trust me when I say that you need this framework, especially if you are just starting out and trying to grow your wealth consistently.
Happy Penny Stocks Investing!
Disclaimer: This article is for informational purposes only. This is not a stock recommendation and should not be treated as such.
This article is syndicated from Equitymaster.com
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