How to buy and sell penny stocks in India

Penny stocks in India refer to those shares which trade at minimal pricing. Companies with low market capitalisation rates usually offer these investment tools. They are also known as nano-cap stocks, small-cap stocks, or micro-cap stocks.

Traders buy penny stocks for speculative functions as they lack liquidity, deals with a small number of shareholders, and demonstrate limited disclosure of information. These shares also remain prone to rate manipulations, regulatory scrutiny, and even sudden delisting from exchanges.

Despite having a high risk, penny stocks in India can transform even a small investment into a fortune. For instance, if you own 50,000 shares of a company having a stock value of Rs 8, then an increase of Rs 1 of the share price would help you earn Rs 50,000 on a single day. However, at the same time, there is a risk of losing a considerable sum of money in one trading session.

Examples of penny stocks

Penny stocks in India remain listed on smaller exchanges and mostly come with below Rs 10 pricing. In the Western Countries, their valuation is usually below $1. Often, companies with a market capitalisation value of lower than Rs. 5,000 Crore release these stocks. Let us have a look at a few examples of penny stocks in India (as on 22nd July, 2020).

How to make profits from penny stocks?

Investors need to keep in mind a few rules and regulations when they decide to buy penny stocks.

1. Along with pricing, check the value of stocks

   Though penny stocks remain priced below Rs 10 in India, it is crucial to assess the value and the business of the company. Conduct detailed research about the products and services of the firm if you wish to buy these stocks in bulk. After all, investing in penny stocks is not similar to trying your luck in a lottery.

2. Study the financial parameters of the firm

   If you are wondering about how to analyse penny stocks, then evaluation of financials of the company, like its growth rate, current debt, and the profit earned in the last five years should act as vital keys. Do not forget to research about the promoter’s shareholding patterns or its stock pledge (if it exists). These parameters reveal the efficiency of the management body and their decision-making practises.

3. Liquidity of stocks

   It is always a sound practice to trade in penny stocks having comparatively high liquidity. Companies experiencing high trading volume have a greater chance of making a profit in the future.

4. Technical aspects

   Determine the technical aspects of penny stocks like its momentum, moving averages, and RSI to check the performance of the financial tool. It will help you ascertain whether the given shares can help you earn a quick return.

5. Do not allocate a large sum of your fund for penny stocks

   Since penny stocks deal with a high risk, it is better to allocate less than 10 per cent of your total investment fund in these financial schemes. In this way, the performance of other investment tools can act as a buffer if these shares perform miserably.

6. Continuous monitoring

   Monitor the performance of penny stocks within close intervals so that you can earn a comprehensive idea regarding their performance. If they are performing well in the financial year, then you can consider investing more funds on them. On the contrary, if they are not performing well, then it is better to sell these shares at the earliest.

7. Refrain from diversification

   Do not consider diversifying your funds among penny stocks of various companies. It will result in decreased net investment as traders usually invest minimal amounts in these financial schemes. Shortlist 2 to 3 high-performing small-cap firms listed in an exchange, and limit your trading within them.

8. Learn to remain calm and composed

   It is crucial to trade in penny stocks with a disciplined approach. If the shares perform well in one month, then do not start investing a considerable amount in them. Similarly, if they do not perform as expected, do not sell all the stocks in a single trading session.

What are the benefits of penny stocks?

1. Probability of High Return

   Penny stocks have the capability of offering much higher returns than other financial instruments. In some cases, they can even yield multiples of the investment sum thanks to their immense growth potential. Small and micro-cap companies usually release these shares, and they might outperform the large and mid-cap funds.

2. Inexpensive

   Penny stocks are available in India at a valuation below Rs 10. So, investors do not require to shell out a fortune to purchase a substantial number of stock units. Moreover, even if traders allocate 10 per cent of their investment profile in penny stocks, they have enough fund for purchasing other safer equity options.

What are the risks associated with penny stocks?

1. Liquidity Issue

   Penny stocks have been in the news for their illiquid nature. Usually, small and micro-cap companies release these shares. It becomes tough for them to find a ready pool of investors to trade on them regularly. Investors holding penny stocks also find it challenging to sell them during an emergency, thanks to their unpopular nature.

2. High Risk

   Penny stocks remain prone to fluctuations in the market. Investors may suffer an enormous loss if they invest in them in bulk, and these shares fail to perform as per expectations.

3. Limited Information about Companies

   It is challenging to gather enough information regarding the companies releasing penny stocks. Most of them are start-ups; so, there is limited knowledge published about their financial soundness, growth prospects, and the profit and loss in the preceding years.

   So, this was all about the penny stocks. You may invest a certain percentage of your fund in these shares if you wish to trade with calculated risk. However, detailed research about the past performance of penny stock releasing companies is essential before investing in them.