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Penny Stocks - Is it the Right Place to Invest

    IndianMoney.com Research Team | Tuesday, May 04,2010, 08:10 PM
 

Have you ever invested in stock market…..??? Do you know, what are the options available for a fresher in stock market…..??? There are some points you need to keep in mind before you enter stock market (equity market). While investing in Stock market we have to keep in mind many things like how to invest, how to get trading account, where to invest etc. But the most important question is, in which kind of stock you have to invest to make profit out of your profit.

Have you heard about penny stocks…..??? Penny stocks are one of the best options to park your money in stock market. Some of you might have invested or must be thinking of investing in Penny Stocks. But before investing in Penny Stock you must be aware of some of the critical things about Penny Stocks.

What is Penny Stocks….?

Penny stocks are named because they cost a penny once but it’s not true anymore. If you invest in Penny stocks you can multiply your money at the same time there is a risk factor also. So the possibility of making loss and gaining profit are equal in Penny Stocks.

Penny stocks are low priced because the companies are growing firms and they may not have sufficient funds for expansion and other things so they have more volatility.

How to trade in Penny Stock….?

If you are looking to invest in Penny Stocks, first of all you should know that Penny Stocks are not traded on standard stock exchanges these are traded on over the counter market.

While trading in Penny Stocks you have to hire a broker to facilitate your buying and selling of stocks. So you have to make sure that you must have enough money in account to cover cost of shares and brokerage.

How to choose the right Penny Stock…..?

Once if you decide to invest in Penny Stocks, the first question raises is how to select the right and profitable penny stock. For this you have to look into some important points such as;

  • Volumes of Trading
  • Company Fundamentals
  • Key Ratios

Volumes of Trading


The volume of trading of the Penny stock which you are going to take is very important factor to consider while investing because if you want to sell your stock there should be somebody to buy. As the Penny Stocks are low liquidity stocks you have to be careful before investing your money in it.

It’s better to invest in the penny stocks which have good trading volumes so you can easily sell and purchase the stock.

Company Fundamentals


Before investing in the Penny Stocks or any other stocks, you should have to check the fundamentals of the company. The financial health of company reflects in the value of its shares. Among fundamentals cash flow is the most important element. So it is better to spare sometime in doing analysis of fundamentals of the company. In addition to this keep track on its goodwill and future projects.

If the earning and fundamentals of the company are good it will be a wise decision to invest in those stocks.

Key Ratios


It’s not only the cash flow which determines the financial health of the company. You should look at the key ratios like PE, EPS, PEG, etc. Price earnings ratio examines the market price of the shares and Earnings of the company. So you can compare the companies on the basis on their earnings and growth.

So do not just take the stock and sell it out for the reason that it costs you less than other stocks and it may reach high levels one day but with a high risk.

Tips for investing in Penny stocks

Once if you have chosen the stock to invest, by merely doing this you can’t be at rest, you have to look in to many other things while making investment. We are trying to give you some tips for the investment in penny stocks;

  • Focus on particular stock
  • Have a proper entry and exit plan
  • Keep away from investing in Unknown Companies
  • Decide your portfolio limit to invest in Penny Stocks

Focus on particular stock


One of the effective techniques to trade in penny stocks is to focus on the particular stock. As we have already discussed about the relevance of selecting the right stock and company to stock. So first and foremost thing is to understand the inside and out activities of the company. So you should target one stock after doing proper research on it.

Have a proper entry and exit plan


If you trade in mid-cap companies you will not be able to trade in more stocks in numbers here in case of penny stocks you can get more no. of shares but at the same the potential for loss is big as the Penny Stocks are volatile. They move quickly up and down. So you should have an entry and exit plan.

Example; suppose if you have bought shares at Rs.10 and its current market price is Rs.12 and your investment is Rs. 2,00,000. If you don’t sell the stock and wait it to be Rs. 13 and it falls down to 8, you will lose 20% of your money i4; Rs. 40,000.

Keep away from Investing in Unknown Companies


Most of the Penny stocks are from newly set up companies so they are naturally totally unknown so you don’t have much information to depend upon while you attempt to make an investment decision. So it is better to avoid the stocks of these companies.

Decide your portfolio limit to invest in Penny Stock


Investing in penny stocks is to make money but at the same time remember that you are putting your capital at risk so you should fix the investment limit of your portfolio which you want to invest in Penny Stock. Ideally it should not be more then 20% of your total portfolio so you can have a balance with your risk profile and returns. To conclude this article we would like to say that although Penny stocks tend to fluctuate rapidly in price, some of the penny stocks can give a great gain in days or may be in hours. The decision to invest in penny stocks should be taken very carefully by considering all the risks and returns associated with it.

IndianMoney.com Research Team

The research team at IndianMoney.com comprises of certified and experienced professionals who share the company's vision to make every Indian financially literate by equipping every Indian with right and unbiased advice. IndianMoney.com research team provides newsletters, articles, videos and FAQs on various financial products and concepts only to help you make wise financial decisions.

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