Why not Invest in Penny Stocks?: Everyone is familiar with the fact of the stock market that it is volatile in nature and risky. There are thousands of companies including small companies and large companies listed on the NSE and BSE. Small public companies’ stock with very low prices is known as penny stocks. Penny stocks are highly speculative because people gamble with huge bids. The price of penny stocks is very low (below 10₹) so people think that they can buy more quantity, but due to very fewer demand chances of the price going high of the stocks is also very low.
Let’s move to reasons why not to invest in penny stocks
1. High risk
Penny stock’s price is very low so people think that they can buy more quantity with less capital but with if stocks go down to 0.5 paisa only they will face big losses because the quantity is high.
These stocks are highly volatile because of low volume and less interest from investors. Only a small quantity of buying and selling can move the stock prices up and down in no time. These prices don’t move with major indexes or sectors.
2. Low liquidity
If investors place to buy or sell order, it takes more time to settle because against the order he needs seller or buyer at the same time. But these small companies have zero or very low volumes. So even if you buy the stock and move up you cannot exit at the price of your choice because of zero or low liquidity.
As we discussed earlier, penny stocks are having less attraction for investors on the stock exchange and due to this reason, they can easily become a target for manipulators. It is very easy to spike the price with small buying and can move the price to a very high level without valid reason.
Let’s understand it with an example If a stock price is ₹ 2 and can move up to ₹5 within no time with a small investment. Other investors start taking an interest to invest because of the 300 % rise and they start buying the stocks. When other investor starts buying the stocks manipulator book their profit and wash other investors’ capital with huge loss.
4. Probability of insider trading
Small public companies share incomplete and less information about their finance and management, there are high chances of insider trading so the direct investors or promoters can easily manipulate the small investors.
Penny stock’s prices are manipulated by speculators so it is not recommended to invest in such stocks, as there are very good stocks available where you can earn good returns with low risk.
5. Nothing for research
Before you invest it is very important to do research about the company. Research can be done by analyzing the charts, fundamentals, financial data, news about the company, management of the company, etc.
But when it comes micro-cap companies with less business information available can be a risky option as there is nothing to research about these companies.
Investing in penny stocks can be like riding the car blindly and trusting someone who is driving blindfolded. Before trusting anyone understands that penny stock is not the right platform to get rich quickly. With greed, your money will stick for a long time in penny stocks and you might end up facing big losses. Instead of that invest in mid or large-cap companies or start SIP if you don’t know how to do research.