According
to a recent Economic Times report nearly 200 penny stocks, which were never
traded since 2000, have seen a resumption of trading on the BSE in the past one
year and some of these stocks have appreciated between 100 per cent and 1000
per cent; months after making a comeback, while a few of them hit the upper
circuit successively over the period. Moral of the story; if there is any one
type of stock which is still dazzling in this choppy market, it is the penny
stock. With the recent fall in the stock market along with brighter future
projections make a lucrative combo, with high growth potential.
Impressive!! Now what is a penny stock?
A stock which is generally sold at less than 10% of its offer value and sold
below par.
Two
common beliefs pertaining to stocks market are that many of today's stocks were
once penny stocks and that there is a positive correlation between the number
of stocks a person owns and his or her returns. While many of today’s bluechips
once started small, the exponential growth they witnessed was based on strong
fundamentals and sound business models. Plus for every one hit you also have
ten or more misses.
Investors
who have fallen into the trap of the first fallacy believe Wal-Mart, Microsoft
and many other large companies were once penny stocks that have appreciated to
high rupee values. Many investors make this mistake because they are looking at
the "adjusted stock price," which takes into account all stock
splits. Rather than starting at a low market price, these companies actually
started high, continually rising until they needed to be split.
The
second reason that many investors may be attracted to penny stocks is the
notion that there is more room for appreciation and more opportunity to own more
stock. If a stock is at 10 paise and rises by five paise, you will have made a
50% return. This, together with the fact that a Rs1,000 investment can buy
10,000 shares, convinces investors that penny
stocks are a rapid, surefire way to increase profits. Want to invest in
the IT sector? With Rs 7,500 you can buy three shares of Infosys
Technologies—or 3,000 shares of Software Technology Group. The very thought
that they can buy 1,000 times more shares makes many investors walk into the
trap of penny stocks.
Unfortunately,
people tend to see only the upside of penny stocks, while forgetting about the
downside. A ten paisa stock can just as easily go down by five paisa and lose
half its value. Most often, these stocks do not succeed, and there is a high probability
that you will lose your entire investment.
The
price may be low, but the mistake of investing in a penny stock can be very
costly. Infosys has risen in value and enriched investors with dividends and
bonus issues. The last time that Software Technology Group was trading above Rs
10 was in September 2009. The company has been in losses for the past two years
and has no reserves.
Now
you know why one is trading at Rs 2,500 and the other at Rs 2.50. There is a
greater chance of Infosys rising by Rs 500 than the Software Technology Group
by 50 paise. Besides, the average daily traded volume of Infosys in the past 30
days is 11 lakh shares. Only 2,800 shares of Software Tech have been traded
daily. Even after taking into account the current challenges that Infosys
faced, it still stands head and shoulders above almost all of the penny stocks
floating in the market.
Penny
stocks aren't a lost cause, but they are very high-risk investments that aren't
suitable for all investors. If you can't resist the lure of penny stocks, make
sure you do extensive research and understand what you are getting into. After
all it’s like searching diamond in scrap; someone might get lucky. Do your
homework well and consider limiting your exposure to a maximum amount, over
which you would risk losing your sleep. Stay Blessed!!
