Making money out of Penny stocks, is like buying a lottery, the chances of winning are pretty low. Recently, an investor wanted to purchase the stock of Kingfisher Airlines on the hopes that some other carrier would buy the airline and the stock would revive.
It did not happen and in fact, the stock is now barely traded.
There are many investors who for years have been chasing penny stocks like Unitech, on the hopes that one day there would be a revival in these stocks and they can give manifold returns. But, most of them end-up being delisted or operations being wound-up.
Sometimes, of course penny stocks can give you good returns, but, they are generally not a long term story. Once these stocks sink, their revival is extremely difficult.
Of course, if they have a solid brand equity and are taken-over by other companies, the story remains altogether different. Here are some steps to follow when you buy penny stocks.
1) Limited exposure
If you have Rs 1 lakh, as an amount to invest, make sure that you do not put the entire amount of Rs 1 lakh in penny stocks. So, in short do not be greedy. Make sure that you have limited exposure to such stocks.
2) Do not buy 8-10 different companies
You should avoid buying several different penny stocks. One day you will realize that your portfolio only comprises of penny stocks. Look at a few penny stocks to invest in. Remember, these do not pay you dividend and they have the potential to wipe out your entire capital.
3) Illiquid stocks
Penny stocks may not be the best in terms of liquidity. What this means that if you have 10,000 nos of particular company, it may be difficult to offload the same at one go. So, as indicated earlier, limit your risk.
4) Bad idea to average
Let's say that you see a penny stock at Rs 10 and you buy 5000 shares. Then you realize that it has become Rs 8 and you buy 5000 more. It again falls and you buy a few more 1000 shares to average the same out . In the end you realize that you are holding a huge quantity .
5) Keep a track of the penny stock
It is a good idea to keep a track of such stocks. They have the potential to even double your money in a short span of time. For example, it is not too difficult to see a stock move from Rs 2 to Rs 4, in a few months. Hence, if you get decent returns it may be a good idea to exit, unless you believe the fundamentals have changed for the better.
6) Buy stocks that have good volumes
Of course, this is not easy with penny stocks, but, you can look at stocks that have a decent volume. For example, at the moment, a stock like Unitech is a penny stock and also has a decent volume. It used to be a speculator's delight in the day. The stock has the best volume among penny stocks today.