What are Penny Stocks?

Investors in Stock Market are familiar with the term “PENNY STOCKS”. Usually in Pakistan Stock Market, Penny Stocks are phrased as Third Tier Stocks or may be Low Cost Stocks. Penny Stocks are the stocks usually trading below the Par Value i.e Rs. 10. Sometimes even stocks having prices less then Rs.20 are also classified as Penny Stocks. Penny stocks or Low priced stocks have the attraction & equally potential of investing small amount by turning into huge sum of profit pretty quickly. But at the same time, same very stocks may lead to wipe-out your whole lot of investment also. For Example it is easy to move stock A from Rs. 6 to Rs.10 almost around 70% of the return. This is just like POL – Pakistan Oil Field stock price moves from Rs.600 to Rs.1000 which is not easy to happen in practical.   

Though penny stocks or low profile stocks have hidden potential to balloon your profits but still remained dangerous investment. Institutional investors avoid usually penny stocks which is why retail investor should also consider before opting.

There is a right way to go about for investing in penny stocks. In Pakistan some of the listed companies started as penny stocks have turn into great success today. Purpose of investments is to make money, so we need to select those penny stocks which are making money. After all, you decided to take high risk and high rewarding penny stocks are good for investment then here are the steps you need to review before consider into your portfolio.

1.    Check that company as a credible business model or otherwise. Companies just moving funds in & out are better to be avoided.

2.    Historic trend of the liquidity of the stock should be considered. As if stock hardly traded in past few months and being witnessed sudden trigger in volumes should be avoided.

3.    Stay tuned to the news & business websites and discussion forums where you are likely to get insight of the company.

4.    Unfold the facts from the market of the company’s tall claims or some ambitious plans. Some analyst or competitors may enlighten you about the true picture of the company.

5.    If you are committing your funds on the basis of DIHAN, in today’s world one can get in touch with company’s management or even PSX - Pakistan Stock Exchange about the facts.  

6.    All penny stocks are not bad, so credibility of the management and the group behind the company also matters.

7.    Never put your all funds in penny stocks even if the stock has great fundamental value. One can commit proportion of the investment for penny stocks and ensure to book profits at regular interval.

          One must remember there is nothing wrong or not all penny stocks are bad, however these stocks are vulnerable and easy to manipulate. They also remained under the radar of regulator in the greater interest retail investor must consider proportion of portfolio for penny stocks with caution and avoid exposing all liquidity in the process.      

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