What are penny stocks?

 

Penny stocks are stocks that trade at very low prices normally below 50 rupees. They have low market capitalization and mostly are illiquid. Penny stocks are lesser-known to the larger investing public. I Investors remain away from them because the information regarding their fundamentals and businesses is either not reliable or not available. However, penny stocks are known for generating multi-bagger returns within a few trading sessions.

Since penny stocks are illiquid, sometimes only a few orders can lead to hitting circuit limit on the exchange. These stocks mostly give higher returns when they are hitting upper circuits for a number of days. Generally, this period of hitting circuits is not accompanied with trading volumes. Sometimes there is a strong fundamental story that moves the stock up. Other times it might just be a case of manipulation by stock operators. They artificially inflate the price and volumes to attract innocent retail investors. Once they have enough traders participating in the stocks they would offload their own holdings. Now that we have understood the modus operandi of penny stocks. lets see why are penny stocks called “Penny” Stocks

Penny Stocks are Called Penny Stocks for a Reason!

Penny stocks trade at such low rates for a reason because most of the traders buying penny stocks don’t even care about them and look to exit sooner or later once they have given decent returns. Penny stocks in India often don’t comply with exchange regulations. They are not even transparent in their reporting.

It is only when there is some news or some turnaround stories on penny stocks, that they move. The speculation leads to an increase in trading volumes and prices soar. But very few of them turn out to be true or genuinely strong on a fundamental basis. Any negative news causes the price to turn south.