Penny Stocks – Definition, Features, and Benefits

Getting information on most penny stocks is a hurdle as they are available with a lack of information in the market. These shares could be the multibagger but may also be considered risky due to low liquidity. For example, you may invest in a penny stock at a low price but face hardship when selling it due to insufficient buyers. These stocks never guarantee ideal returns in the stock market. A few penny shares also got delisted because of significant losses. Scroll down to understand penny stocks better before investing in them.  

What is Penny Stock?

Penny stocks are the equities of publicly listed companies traded at a low price, typically less than ₹20 per share. These companies generally trade with low market capitalisation and low trade volume. Desiring high returns from penny shares could be a good fit. However, relying on them might lead to significant losses. It is essential to trade in penny stocks carefully. Consider them as a side option or a chance to become a multibagger.

Features of Penny Stocks

Explore the features of penny stocks listed on the NSE (National Stock Exchange) and BSE (Bombay Stock Exchange) or traded over-the-counter (OTC) markets.

• Unpredictable Price: Certain penny stocks face price swings and are poised to challenge investors to assess their trends. There can be different reasons behind the unpredictable price of these stocks. These reasons may include economic slowdowns, market sentiments, company news, and investor behaviour shifts. 

• Low Liquidity: Penny stocks highly suffer from illiquidity. It means investors often trade in them. Less trading volume or low liquidity in penny shares makes it difficult for sellers to find buyers immediately. It may take time to sell the penny stocks on D-street. 

• Risky Investment: Investing in penny stocks comes with a higher level of risk. Low liquidity and limited historical information pressure investors to avoid investing in these stocks. Thus, a buyer may face difficulty in converting this investment into real money. Some of these stocks face a severe decline in their value over time. 

• Multibagger Returns: Low prices of these stocks promise investors to offer multibagger returns. It is not fixed whether every penny share becomes a multibagger. One must invest in them with careful consideration. Including penny stock in the portfolio might be the stepping stone as it can increase the overall return prospects by outperforming large-cap and mid-cap funds.  

• Limited Information: Penny stocks listed on the NSE, BSE, or trade over-the-counter (OTC) market are available with limited historical information and lack of public information. Thus, it could be difficult for investors to know about the company’s past records and performance to assess its growth potential for the coming years.

Benefits of Investing in Penny Stocks

We’re finally done with what is penny stock, and now is the time to explore some of the benefits investors can get after buying penny shares on the NSE, BSE, and over-the-counter (OTC) markets in India. Explore the benefits below. 

1. Low Priced

Penny shares often come at low prices, which offers investors the option to buy thousands of shares with a low capital amount. Low entry price makes them accessible for small investors with limited capital. It also diversifies investors’ portfolios with a small portion of their capital invested.  

2. Short-Term Movements

Penny stock often experiences short-term price movements due to sectoral trends, market news, company financial reports, etc. Thus, investors can benefit from such short-term movements to generate returns. A rapid price swing could prove that investing in these stocks is strategic buying. However, low liquidity might cause sellers to suffer from selling their hold quantity at market prices due to fewer buyers simultaneously. 

3. Early Entry

Shares of small companies offer investors an opportunity to enter early. With the help of an early entry strategy, they can take advantage of the company’s expansion and success. Moreover, taking a position in the stock early could offer individual low-priced investments and multibagger returns. 

4. Multibagger Opportunity

Not all penny stocks show rapid price movements, but those that do might become multibagger in the short run. Some of these stocks have the potential to yield higher returns in a short time period. Including them in the portfolio might help individual sets of previous losses and generate balanced returns. Moreover, a higher quantity of holdings at low prices would be a plus point for investors to maximise their wealth through these shares. 

Disadvantages of Penny Stocks 

Besides several advantages, penny shares come with some disadvantages that investors should consider before investing. 

1. Lack of Information

Limited historical information or public information is a consequence of investing in penny stocks in India. It creates difficulties for investors to research these shares and identify the fundamentally strong among them. Invest in the popular penny stock available with details about the company’s financials and technical parameters. 

2. Low Liquidity

Low liquidity in penny stocks makes it difficult for the sellers to cash out their holdings. They are generally traded in low volumes and are challenged to get orders executed at the desired prices. Investors must assess and monitor the trade volumes of these stocks to eliminate the risk of fewer buyers in their investment journey.     

3. Pumping & Dumping

Unscrupulous investors sometimes target penny stocks to pump and dump. This means that they artificially fluctuate stock prices by misleading information to trap buyers into buying shares at higher prices. It leaves small investors with significant losses. 

How to Choose Fundamentally Strong Penny Stocks?

To choose the fundamentally strong penny stock, follow the steps mentioned below. 

• Step 1: Identify and assess the company’s financial position and competitiveness through its strategies, management team, operational efficiency, and financial statement. 
• Step 2: Conduct technical research using PE ratio, PB ratio, Earnings Per Share (EPS), profit margins, and other technical parameters to assess stocks’ growth potential. 
• Step 3: Assess the industry trends and be prepared for short-term fluctuations to generate potential gains. 
• Step 4: Consult your financial advisor or Univest to choose fundamentally strong penny stocks. 
• Step 5: Add potential shares into your portfolio to make it diversified. 
• Step 6: Monitor industry trends and your portfolio to book profit on time so as to get rid of significant losses. 

Let’s Wrap on Penny Stocks

In short, penny stocks typically offer a seamless earning opportunity to investors with some associated risks. They include risks like low liquidity, limited historical information, and pumping/dumping schemes. These companies have low market capitalisation, which means a lack of competitiveness against giant players. It is essential to invest in penny stocks carefully to generate multibagger returns.   

FAQs for Penny Stocks

1. What is penny stock?

Ans. Penny stock is the share of a small company traded at low prices, typically under ₹20 on the NSE, BSE, or over-the-counter (OTC) market. These stocks often trade with low liquidity or volume and generally attract investors looking to invest a small amount of money to generate higher returns. Penny stocks are highly speculative investments and come with higher risk. 

2. Is investing in penny stocks risky?

Ans. Penny stocks are considered to be highly speculative in nature. It often provides multibagger returns but comes with the risk of significant losses. The risks associated with these stocks include difficult exits, low liquidity, limited historical information, and price manipulation. Investors need to conduct their research before investing in these stocks.  

3. How to identify the multibagger penny stocks?

Ans. To identify the fundamentally strong penny stock, investors should conduct comprehensive research on their financial statements, debt levels, and growth prospects. It is important to consider the technical analysis of these stocks to analyse their growth potential in the coming decades. 

4. How to invest in penny stocks in India?

Ans. Investing in penny stocks is not a complex process. One must have a Demat account to place a transaction. These shares come with high-risk, high-reward play. Thus, it is essential to conduct thorough research or consult a financial advisor like Univest to choose the best stocks. 

Also Read: Best Debt-Free Penny Stocks in 2024.

Explore for more information on penny stocks.

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Penny Stocks Under ₹20 As Per Market Capitalisation

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Penny Stocks Under ₹50 As Per Market Capitalisation

*Data is updated as of 1st January 2025.

Best Penny Stocks to Buy Now

*Data is updated as of 1st January 2025.

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Note: Penny stocks are highly speculative investments. Do your own research before investing in these stocks.