Last updated: February 17, 2023, 6:03 PM IST
You may have come across the jargon penny stocks often in discussions about the stock market. Penny stocks are essentially those stocks that trade at a low price on the exchanges. Generally, penny shares are worth less than Rs 10 per share. Penny stocks usually have a low market cap.
Because of their relatively lower price, investors view penny stocks as a tool for making money quickly. Investing in multiple penny stocks in lower amounts can sometimes even pay off.
However, in a rush to make a quick buck, one can easily make some wrong decisions while investing in penny stocks. According to experts, companies with a market capitalization of less than Rs 500 crore are often more prone to market volatility and stability can be a major issue in such companies. These are not big companies or highly regarded brands in their respective industries. So it can be difficult to track their progress or achievements.
Here are a few things to keep in mind when investing in penny stocks.
Share price manipulation
The stocks available for trading on the market are limited for small businesses. Due to the low market capitalization and low liquidity of penny stock companies, they are subject to easy price manipulation. As an investor, you should not be tempted by the sudden rise or fall in price of these penny stocks.
While it can be difficult to find information about small companies, you should only buy stocks after researching the company’s future growth prospects, product, performance and background. It is recommended to go through the balance sheet and financial statements of such companies before choosing a penny to invest.
Do not invest large amounts
An investment in penny stocks involves significant risk. These stocks can peak at any time, but stability can be a major issue. They never move in tandem with major sectors or indices. Do not invest a lot of money in one-cent stocks to protect yourself from unexpected price fluctuations.
Close if you make a profit
For the same reason as mentioned above, it is advisable to stop once you have made a profit. Sell the stock as soon as prices rise and exit the stock with a good return.
Be wary of insider trading
Insider trading is more likely due to these companies’ reduced or incomplete information sharing with investors. Retail investors are easily manipulated by promoters or other institutional investors. When the insiders or key stakeholders in such companies sell their shares, it can be an indication about the company’s financial health or future prospects. So it is better to always remain vigilant about insider trading in such stocks.
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