Penny stocks: what are they & how to find potential penny stocks

Isn’t it amazing to invest in stocks which trade below Rs 20-25, you might think to buy these stocks as its trade price are low? But do you know what are these stocks, whether to invest in these stocks, how to start investing in these stocks?

The stocks which are traded below Rs 20 or 25 are called penny stocks. They have a very low market capitalization of under 500 crores. These stocks belong to the micro-cap category These stocks attract beginners and urge them to invest in it, this may lead to losses. Penny stock prices are small in number, enough research not done investors may end up making losses.

Some traders are drawn to penny stocks because their low prices mean they can buy a lot of shares and profit from small changes in the stock price. However high volatility and frequent fraud make investing in penny stocks very risky.

These stocks are speculative in nature and are highly risky. these stocks are considered risky due to the lack of information available.

These stocks can easily be manipulated by a pump and dump scheme. Many of the penny stocks companies release news and pay promoters to pump their share prices with sensational headlines. These companies generally use keywords like “agreements, contracts, advancement, etc” as they think that most investors are lazy and they do not read past the headlines. These penny stocks companies recruit third-party online promoters to send out promo emails and publish misleading false articles.

Before investment keep in mind

Research the competition and industry sector in which the company operates. Look at the company's history and the reputation of the management. You can find this information from various sources, such as company websites, reliable sites that track stock performance, etc.

Try to target companies with good results and consistent performance.

Some companies insert emails, newsletters, and other material disclaimers to promote the stock. It is important to read this carefully.

How to find the stocks

Before answering this question answer yourself Do you want to invest in penny stocks?             

We have discussed above the pros and cons of penny stocks. If you wish to invest in penny stocks then read further.

1. Understand the market

Whether it is an investment in penny stocks or any stocks you need to have knowledge of the market, whether the market is bullish or bearish, the market trend, the movement in the market. you need to gain knowledge about the market and study the market.

2. Proper analysis

There are thousands of shares listed on the stock exchange, proper research is done about the industry and the company. Generally, investors invest in large-cap and mid-cap companies, very few invest in micro-cap companies.

Before making an investment in penny stock companies first study the industry it belongs to and then research about the companies, its promoters, its management, carry the fundamental analysis of the company, check whether it is debt-free, the background of the promoters.

3. Trade with virtual money

If you are investing in penny stocks for the first time begin with paper trading, test yourself in the live market with virtual money and after gaining confidence invest your hard-earned money. Create your imaginary portfolio for some time test your knowledge, skill, and strategy, and then invest your money.

4. Value and price

You have two companies to invest your Rs 5000.

Company A is trading at Rs8 per share and

Company B at Rs 3 per share

You would be attracted to company B as its trade price is lower. Before investing assess the value of the company. The reality is not always what is seen, it can be possible that the value of company A is greater than company B. company A could have turn to multi-bagger due to its reputation and value.

To determine the value of the company you can study the book value per share and P/E ratio. The book value per share helps in determining the net worth of the company and the P/E ratio helps you understand whether the company is undervalued or overvalued. If the company is undervalued it means the company will perform better in the future turn to be multi-bagger and if overvalued it could head towards closure.

It is difficult to find these ratios at one place and compare it with its competitors. With Ticker, you can find all the ratios at one place and its peer comparison.

5. Do not lose gold in search of diamond

The pandemic had made many jobless, many people have lost their job and in free time people search for jobs or businesses where low investment is required. There are many rags to riches who would tempt you to earn money through penny stocks and turn you to a millionaire.

Beware of these gold rushes. Don't forget to invest in knowledge before investing money everywhere. Invest in your knowledge first, so no one has to lure you with money.

 Invest after properly analyzing the company you want to.

Tips For Penny Stocks Investment

Since you can encounter many obstacles when investing in low-priced stocks, you may need to work with a financial advisor to guide you through the entire process.

 If you invest in low-priced stocks, you must use your disposable income to do so. Don't risk it by using emergency funds, retirement savings, or other important sources of funding.

 The key to a successful investment is not putting all your eggs in one basket. An easy way to diversify investing is to invest in mutual funds or exchange-traded funds (ETFs).

It is difficult to judge whether penny stocks are good or bad in terms of investment, if proper knowledge and research are conducted and the right penny stock is chosen, the risk can be minimized. Make sure proper fundamental and technical analysis is done before taking any step towards investment.