It is well known that Penny Stocks with good fundamentals can give multibagger gains
We saw the example of Zenith Birla, a penny stock with good fundamentals, which has given an awesome return of 300% in just 3 months.
We also the names of penny stocks under Rs. 6 which have multibagger potentiall.
Penny stocks are extremely low-priced stocks which witness active trading in strong bull markets when investors are willing to take risk to attain multibagger gains frim investments.
In India, penny stocks generally trade between Rs 0.05 and Rs 10 per share. These are ultra stocks of micro and nano-cap companies.
The low price of the penny stocks allows investors to purchase a large number of these stocks.
The returns get magnified due to low price of the penny stock.
Investors must be careful to invest in only those penny stock stocks which have good fundamentals.
Penny stocks are illiquid and prone to price manipulation. Timing the entry and exit becomes critical here.
This makes these suitable for short-term investors who can buy and sell the stock at short notice.
It is also implied that only investors with an risk appetite should dabble in penny stocks.
Penny stock investors who have made a fortune
There are several examples of real-life investors who have made a fortune
BusinessLine has presented a profile of these real-life penny stock investors and how they made a fortune for themselves.
The common technique is to find stocks with good fundamentals and dividend paying track record.
S Dheepak, a Chennai-based active investor in penny stocks with two decades of experience in stock market trading, has revealed his technique for finding multibagger stocks:
He explained that he does proper research into the fundamentals of the company and has a strategy or checklist while selecting penny stocks.
The strategy or check list includes checking the company’s management, history of the stock price, price charts for more than one year and volume build-up or breakouts in the past, whether the company has reasonable debt.
He also tries to understand what drove the stock price below Rs10, making it a penny stock.
Prashant Tejura, an active day trader and long-term investor, revealed that he bought Urja Global between Rs 1.0 and Rs1.5, which went on to hit Rs 10 in a few months.
He chose Urja Global because many other solar sector stocks were also rising. Urja displayed positive technical analysis cues, which became a high conviction set-up.
He got 10x multibagger gains from Urja Global.
Kumaran Nithiyanandhan relies on tips from brokerage research firms on which penny stocks with good fundamentals to buy.
He clarified that he does not just buy because the price is low but researches the fundamentals of the stock before making an investment in it.
He also maintains a strict stop-loss when buying penny stocks.
Kumaran Nithiyanandhan has made multibagger gains from stocks like Sanwaria Consumers, JP Associates and Unitech.
He advised that investors should not buy stocks unless they are confident about the fundamentals of the stock or some events affecting it.
He made huge multibagger gains from SpiceJet which he bought at a very low price.
SpiceJet was then a big airline with good fundamentals and was backed by the Sun TV Group.
Prashant Tejura relies on technical analysis while buying or selling penny stocks.
He explained that because penny stock companies usually have low quality management or negative future outlook, speculating on improving fundamentals can be of limited use.
The use of basic technical analysis to understand the chart of the sector and the basket of stocks helps in these circumstances.
The charts of penny stocks help to identify support levels that offer good risk-to-reward ratio.
Prashant Tejura advised that traders cannot avoid risk but can control it. Risk must be managed as per trading plan and let the profit run to take care of itself.
Ravi Padmanabhan warned that there are multiple risks in investing in penny stocks as they are not fundamentally-sound companies.
Penny stocks like Kingfisher, Teledata, KS Oils, GV Films etc failed to turnaround and made huge losses for investors.
Ravi Padmanabhan advised investors in penny stocks to never invest in companies that are not making a profit and which have negligible chances for revival.
He also suggested that it is better to accept mistakes and move on. Refusal to accept a loss can result in complete loss of capital and, in some cases, the stocks are suspended from trading, he said.
Penny stocks also face the risks of de-listing if the company fails to meet the stock market’s disclosure requirements.
There is also a risk of price manipulation of penny stocks due to low liquidity.
The lack of genuine information relating to the fundamentals publicly available on penny stocks is another risk that investors should note. The key to successful investing is to get enough information on the stocks to take informed decisions on whether to buy or sell, the BusinessLine advised.