Last Update: February 17, 2023, 18:03 IST
Even investing small amounts in multiple penny stocks can be beneficial at times.
Due to the low market capitalization and low liquidity of penny stock companies, it can be subject to easy price manipulation.
You will often come across the jargon penny stocks when discussing the stock market. Basically, penny stocks are those shares which trade at a low price on the stock exchanges. Penny stocks generally come at a price below Rs 10 per share. Penny stocks typically have low market capitalizations.
Because of their comparatively low price, investors view penny stocks as a means to make a quick buck. Even investing small amounts in multiple penny stocks can be beneficial at times.
However, in the rush to make a quick buck, one can easily make some wrong decisions while investing in penny stocks. According to experts, companies that have a market capitalization of less than Rs 500 crore are often more vulnerable to market volatility and stability can be a major issue for such companies. These are not large companies or highly respected brands in their respective industries. So it can be difficult to track their progress or performance.
There are a few things you should keep in mind while investing in penny stocks.
stock price manipulation
Shares available for trading in the market are limited to smaller companies. Due to the low market cap and low liquidity of penny stock companies, they are subject to easy price manipulation. As an investor, you should not be lured by the sudden rise or fall in the price of these penny stocks.
company research
Although it can be difficult to find information on smaller companies, buy shares only after researching the future growth prospects, product, performance and background of the company. It is advised to read the balance sheet and financial statements of such companies before selecting penny stocks to invest in.
don’t invest big amount
Investing in penny stocks involves a lot of risk. These stocks have the potential to rally any time soon, but sustainability could be a major issue. They never correlate with key sectors or indices. Do not invest a lot of money in a penny stock to secure yourself from unexpected price movements.
exit if you make a profit
For the same reason as stated above, it is advisable to exit as soon as you have made a profit. Sell the shares as soon as the prices rise and exit the stock with good returns.
Beware of Insider Trading
Insider trading is more likely to result from these companies underreporting or sharing incomplete information with investors. Retail investors are easily tricked by the promoters or other institutional investors. When insiders or important stakeholders of such companies sell their shares, it can be an indication about the company’s financial condition or future potential. So, it is always better to be cautious about insider trading in such stocks.
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