What are Penny Stocks? What are the Risks Associated with Them?

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Penny stocks are stocks which have low share price and are very volatile. The share price of penny stocks may range from very low values from Rs 2 to 20, they also have a small market cap.

When we look back there are stocks which gave return from 10per cent to more than 100 percent and there are also stock which turned worthless.

What are Penny Stocks? What are the Risks Associated with Them?

These companies are mostly start ups or companies which have not grown during the years. Investors or speculators can drive these stock prices easily due to low liquidity and low market capitalization.

What is the Benefit of Investing in Penny Stock?

If the right stock is identified then the rate of return is huge, as high as 200-500% . As they are cheap, you can buy large quantities. Sometimes the loss is not very high as penny stocks come at cheap price.

It may so happen due to temporary hiccups and bad environment these company may trade at lower price. Once market and economy turns they can give super normal returns.

Risk associated with Penny Stocks

1) Liquidity

These companies are not traded regularly, any small news may have huge impact on the stock movement. They are also difficult to exit due to lack of liquidity as buyers will be less.

2) High Volatility

Due to low market cap, any bulk investment or exit may double or half your investment amount.

3) Lack of information

Due to insufficient information about the company, one must take trouble to go deep to procure information on such companies.

Should You invest?

As you have read, investing in such stocks are very risky. If you are ready to take risk on the complete amount with such questionable companies then go ahead. Because once you invest in bad companies it is difficult to get your capital back or invest in healthy companies which will stand the the test of time.


Read more about: penny stocks
Story first published: Monday, December 8, 2014, 11:08 [IST]
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