Penny Stocks are cheap stocks that investors can buy or sell even with limited capital at their disposal.
The biggest advantage of penny stocks is that the risk is limited while the gain is infinite.
So, all investors should have some of their funds invested in penny stocks alongside Blue-chip and high dividend yield stocks.
This way, the allocation of capital will ensure that the gains are high while the risk is manageable.
Highly Volatile stocks
One of the main charms of penny stocks is their volatility.
This makes them different from other stocks such as blue-chips.
A large-cap blue-chip stock will hardly move one or two percentage points in a month or even in a year.
However, a penny stock can give explosive gains by moving 20% in one trading session.
The only thing that limits these stocks is the upper circuit filter imposed by the NSE and the BSE.
Penny stocks are volatile because the underlying companies are just starting their business operations and are still not stable in terms of sales or profitability. Also, they lack proper fundamentals and a track record of growth and profitability. This makes them speculative in nature.
Managing risk of penny stocks
It is obvious that the extreme volatility of penny stocks makes them highly risky.
The risk is accompanied by the prospects of high returns and so it is acceptable and worthwhile to sophisticated investors.
Yet another risk factor of penny stocks is the fact that unscrupulous promoters and operators manipulate them t their own advantage, at the cost of innocent investors.
It is also a fact that penny stocks have a problem of lack of information. These stocks are smaller and are subject to regulations that are not as stringent as that applicable to large-cap stocks. Their financial statements may not be upto date or properly audited, and this adds to the risk of these stocks.
Multibagger gains are also possible
However, the risk is balanced by the potential of unlimited gains.
Sanwaria Consumer, for instance, surged 300% in just a few months. Similarly, Alok Industries has been a great multibagger penny stock, after it was acquired by Reliance Industries.
Even otherwise, it is common to see penny stocks move up 20% on one day, and 50% in a month.
If investors find the proper penny stocks to invest in, the risk and reward are properly balanced.
Acquisition by large companies
The fate of Alok Industries is a good example of how penny stocks go on to give multibagger gains after they are acquired by giant corporations like Reliance Industries.
Penny stocks are usually small and growth-stage companies and this makes them an attractive acquisition candidate for large companies which are looking to grow inorganically.
Guide To Making Money From Penny Stocks
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