Penny stocks are highly risky and include stocks that are offered in the market price range of Rs. 1-Rs. 10. With limited trading volume and no fundamentals to account for, the investment option has however managed to yield good returns for the investors who find it easy to pick on these stocks because they do not prove to be heavy on their pockets.
Purely a speculative bet with prices deemed to be low which may not be the case: Deemed to be lowly priced which may not be the case with many of the penny stocks as they are found to be trading at high valuations. A low priced stock in the market parlance is the one which is trading at a discount to its intrinsic value which is difficult to figure out.
Limited volume in respect of trading and hence high volatility: Moreover with limited trading volume, they are exposed to a higher degree of volatility measured by beta in stock market trading. The limited volume opens rooms for unscrupulous price rise and decline through price manipulation.
Fundamentals of such penny stocks cannot be ascertained correctly: These companies do not provide for any research reports. Some times even the audited financial results are put in question. Nonetheless, you have financial ratios to rely upon if you still can bet on these highly risky stocks.
Also chances of delisting exist: With high speculation, penny stocks are exposed to a higher risk of being delisted as traders and other participants misuse it for various taxation and other gains.
Points to note before investing in such stocks
Financial information such as revenue, debt and equity,EPS and price multiples of such scrips should be checked on.
Also prefer penny stocks of a higher market cap over lower ones.
Assure that the company has been in business for quiet few years and promotes hold substantially in these scrips.