What are penny stocks?
Penny stocks are characterized by their low market price, often trading below Rs 10 in the Indian stock market, and possess a notably modest market capitalization. Typically found on smaller exchanges, these stocks are marked by their speculative nature, rendering them highly risky investment options. Their precarious nature is attributed to factors such as limited liquidity, a relatively small shareholder base, wide bid-ask spreads, and a lack of comprehensive information disclosure.
Investing in stocks is often considered high-risk due to the aforementioned factors, making them a choice that demands careful consideration and risk assessment for potential investors. Penny stocks are stocks that 9 out of 10 times fail to perform and the history of such stocks is always not that fruitful for investors and there has been destruction of wealth in most of the cases.
In a layman’s language Penny stocks allure speculative traders with the enticing prospect of rapid and exponential growth, seemingly providing opportunities to double, triple, or even quadruple their investments. However, it is crucial to recognize that the notion of easy money is illusory in the world of penny stocks. While the potential for significant gains exists, the inherent risks and volatility associated with these stocks underscore the importance of exercising caution and conducting thorough research.
What is the business model involved in the pump and dump scheme of penny stocks?
Penny stock scams involve deceptive practices where fraudsters employ “pump and dump” schemes reminiscent of those portrayed in movies like “The Wolf of Wall Street”. These schemes capitalize on high-pressure sales tactics to exploit unsuspecting and inexperienced buyers who are unfamiliar with the intricacies of the financial markets.
In the “pump” phase, fraudsters employ disinformation to artificially inflate the price of a penny stock, luring in more unsuspecting buyers. Once the price reaches a peak, the scammers execute the “dump” phase by selling off all their shares, causing the penny stock’s value to collapse. This leaves other investors holding devalued or virtually worthless stock.
Should an individual invest in penny stocks?
It’s important to note that not all penny stocks are fraudulent, but the majority of them offer limited opportunities for genuine growth. Many remain stagnant for extended periods without significant changes in value. While a select few may experience gradual appreciation and eventually move to larger stock exchanges, such instances are exceptions rather than the norm.
Caution and due diligence are essential for investors navigating the volatile landscape of penny stocks. As emphasized earlier there is no easy money in the capital markets world. Instead of penny stocks , microcaps and smallcap & selected SME stocks should be the stocks to discover value.
How does one identify a microcap , smallcap or SME stock?
Investors in microcap stocks face the challenge of limited available information. However, the advantage lies in the possibility of conducting more in-depth research due to a certain level of visibility. A prudent approach involves closely monitoring significant corporate developments within these stocks.
Key indicators of a potential shift in a microcap/smallcap/SME stock’s trajectory include the
- Receipt of substantial orders
- Preferential issues
- Bulk deals
- joint ventures or partnerships
- Excellent financial results
- Takeovers
- Rights issues
- instances of promoter buying
These events often generate notable market buzz, signaling a potential change in the stock’s narrative.
By attentively tracking such developments, investors can gain insights into the dynamics of a microcap stock and assess the factors that might contribute to its future performance. This proactive approach allows investors to stay informed about critical events that could impact the stock’s value and make well-informed decisions in a market segment known for its volatility and potential for rapid change.
Examples of certain microcap , smallcap & SME stocks becoming multibaggers in 2023 :
| Stock name | Stock Journey | Stock trigger |
| Taylormade Renewables | Stock was Rs 42 in January 2023 & is currently trading at 750 in December 2023 | On 17/01/2023, the company got a order worth 11.46 crores which was the turning point for the flow of orders |
| NPST | Stock was Rs 250 in January 2023 & is currently trading at 2150 in December 2023 | NPST is the only listed company to provide UPI switches and its trigger was when they made a super app for Canara bank) |
| RMC Switchgear | Stock was Rs 165 in January 2023 & is currently trading at 615 in December 2023) | On 22/9/2022 , the company announced a preferential issue of shares and from there a lot of developments initiated and the stock gave stellar returns. |
| Gensol Engineering | Stock was Rs 40 in January 2022 & is currently trading at 765 in December 2023 | Gensol engineering started getting big solar EPC orders and it entered the business of manufacturing of affordable EV cars which led to a bigger upward journey for the company |
There are various platforms you can find on Google to search for things. One such platform is Sovrenn, the entire subset of the above factors. Sovrenn is a knowledge-based platform that only emphasizes microcap / smallcap and SME growth stories. As an individual who has less information about these microcap, small-caps & SME stocks, you can visit Sovrenn and get detailed information about these segments. The website has a DISCOVERY tab, which provides the entire cohort of information like (receipt of substantial orders, preferential issues, bulk deals, joint ventures or partnerships, excellent financial results, takeovers, rights issues, or instances of promoter buying) and many more.
