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Buying Penny Stocks and Their Risks

Personal Finance

It’s no secret that the stock market is known for its uncertainty and risk. For penny stocks, this risk factor peaks tenfold.

Penny stocks are shares of small public firms that trade at low prices. These equities are pretty speculative. Generally, new investors make the mistake of investing in them. Hence, these penny stocks can be risky if you plan to buy any. Moreover, these stocks are worth less than a penny due to extremely low demand.

However, certain circumstances can cause their prices to skyrocket. But that’s a rare phenomenon! So if you’re googling “best penny stocks to buy“, hold on to your horses. In this blog, you will learn all about penny stocks and the risks that come with them.

What are Penny Stocks?

First things first, penny stocks usually cost less than Rs. 10 in India. These are the stocks of businesses with comparatively small market capitalizations. They are also known as nano or micro-cap stocks.

Penny stocks have the potential to rise dramatically and generate significant returns. Moreover, it happens in a relatively short period, ranging from a few weeks to even a few days. This is why some investors find penny stocks alluring. They believe they can purchase a significant number of shares for a relatively low cost. In return, they hope to receive exponential returns if the stocks become multi-baggers.

Simply put, these investors anticipate that penny stock businesses will expand quickly. Furthermore, they believe that a turnaround is imminent, which will increase the stock value.

Herein lies the problem. Generally, penny stocks fail to produce exponential profits. So what they anticipate is only possible once in a blue moon.

Why Should I Not Buy Penny Stocks?

Here are six reasons why you should not invest in penny stocks:

Penny Stocks are Inexpensive

Penny stocks typically quote low prices since they are worth more. Most penny stocks seem appealing due to their low P/E ratio. A lower price-to-earnings ratio is generally a good sign.

A low P/E also indicates a lack of investor confidence in the stock. Generally, these penny stock businesses frequently engage in creative accounting. As a result, this causes the profits to be exaggerated.

Manipulative Investors

Penny stocks are less likely to generate trade activity on the exchanges. Therefore, they’re vulnerable to easy manipulation. As a result, even a small investment can cause the market price of these shares to soar to unimaginable heights.

Penny Stocks Typically Move in Lucrative Industries

At this point, the game of penny stocks follows a set pattern. At the height of the technology boom, numerous fly-by-night businesses changed their names to resemble IT firms.

In addition to generating interest, these companies successfully managed IPOs and private placements at absurd valuations. But, unfortunately, the investors got duped and realised this quite late.

In Penny Stocks, Basis Risk is a Significant Concern

What exactly do you need to know about basis risk? First, it is the discrepancy between the buy and sale share prices. It is crucial, since it raises costs when you purchase them and lowers your advantage when you try to sell them.

You’ll also notice that such stocks are usually found in lower circuits. As a result, trading in and out of these stocks becomes impossible. In return, you lose out on your investments.

With penny stocks, you might witness this frequently. For example, you can enter a stock while witnessing high volumes. Then, when you establish a position, you might see that purchase orders are being cancelled.

So, what causes this to occur? Most of the counter’s buyers and sellers are the same circular traders. When they observe retail purchases at higher levels, they will cancel their purchase orders from lower levels. It implies that the selling/buying order book will now appear lopsided.

As a result, it will encourage more selling. This is way more frequent when a small number of dealers control the majority of the volumes.

No Records to Investigate

Before investing, research is crucial. An investor should evaluate all the factors. It must include the stocks’ fundamentals, technicals, financial data, past news, and management information.

However, these penny stock firms are owned by micro-capital limited entities. As a result, there are no insights available to the public. Therefore, buying these stocks might be dangerous due to the need for more research opportunities.

Generally speaking, it is challenging to identify penny stocks with solid fundamentals that provide significant returns. To sum up, we think that penny stocks are a precarious investment.

Therefore, before choosing to invest in penny stocks, one should perform all necessary research. If you’re seeking our opinion, we advise you to stay far away from penny stocks.

All About Penny Stocks: A Quick Recap

Let’s review what we’ve discussed today:

  • Penny stocks have extremely low market capitalizations.
  • They trade at extremely low prices.
  • Due to their low price, they frequently attract investors. But they come with high risk and are very vulnerable to market volatility.
  • Investors may find it particularly challenging to purchase or sell their penny stocks. It is due to their limited liquidity and low trading volume.
  • Price manipulations are a common phenomenon with penny stocks.

Final Words

We think there are better uses for your hard-earned money than investing in penny stocks. These stocks are unlikely to fetch you any profit. Instead of these penny stocks, you would be better off buying high-quality stocks that can be well-invested.

If you are still interested in investing in penny stocks and are searching for penny stocks to buy, check out the Piramal Finance website right away.