What are penny stocks
so what is the first question that pops up in your mind that is nothing but What are penny stocks? So when I try to find the definition of penny stocks to be honest I did not find any exact definition in any law or act even we try to find out semi-circulars no definition
was mentioned but then what we did we went through a lot of newspaper articles web-based articles and one common kind of a definition is what I can say was found everywhere and what is that there it is based on two different conditions. Number one Price wise condition and the Second one is Value-wise condition. Now what is price wise condition? It says that the market price of that stock should be less than rupees 10 okay and value-wise condition it is value-wise means market cap wise okay it mentions that it should have a very low market cap simple till here, now let me give you an example so that it is fit into your mind the very first one example can be Idea Vodafone can I say it satisfies the first condition? is trading somewhere around nine rupees so first condition price wise condition is met. What about value is condition value? market cap of this stock is around 30, 000 crores so I can not say that value-wise or market cap why is it is Penny okay so Vodafone Idea cannot be classified ideally as a penny stock right.
I will give you another example now GM-Polyplast or Hindustan Hardy and I am sure you have never heard of it of these names okay, now if I talk about these two stocks first one is a price wise condition and both these stocks are somewhere around 300 so it is the first condition met? No. Second condition market cap of both these stocks is very less so is the second condition met? Answer is Yes but then still because one condition is not met it is not to be ideally considered as a penny stock. Now let us take an example of a stock which was the talk of the town last year and that is nothing but TTML, can I say at that time somewhere around beginning of 2021 was the first condition met? Yes it was trading somewhere around seven rupees was a market cap also very less? Yes. Now let’s have a look at the chart of TTML. Have a look at this now if I were to measure the returns from somewhere around 1st of January 2021 till 11th January 22 where the stock hit the highest point of almost 290 the Returns come up to more than 3,500 percent that is a mind-boggling rally right but then if you see were people really able to get into the stock or not?
so this might have been a zone where few people might have entered because the stock was in a sideways trend for quite some time but you know once the stock actually starts running that is where the fomo also starts getting built up and for those who are not able to enter at lower levels they are going to be like oh my god I am just missing out on the rally and this stock just hit massive back-to-back upper circuits to reach till almost 291. Now the question why this rally happened in TTML?
So for that I am referring to a mint article and in that they have mentioned that according to a business standard report they suggest that Tata Group was looking to revive Tata Tele Services by taking technical expertise for a new app which they were going to build Super App, now what was the thought process of this Super App they were going to bring all Tata Group related products and services under one platform and enable sales directly to the consumers for this very thing Tata Suns had infused almost 46,595 plus crores till June 2019 so because of this there was a big buzz in the stock and the stock rallied from the levels of whatever I told you right now around what seven rupees till continuously two hundred ninety rupees okay now the problem is that after this rally happened there might be some dukhi atmas who found entry after the stock started hitting lower levels and they might be like all right it has already gone down from 290 to somewhere around 250 or whatever they might have entered at that level then starts the Journey of the lower circuits and the Sideways trend and the Downward trend and the stock even today is trading around 113 rupees.
Now the question was that why did this stock not perform well? why the downfall from 291 till almost 130 rupees? In the same article of mint you can see of course this is a little backdated article but it is interesting to read these two lines only for the financial year 2021 of course as I mentioned thoda purana data previous year 2000 crore rupees is the amount of loss that this company is in and number two out of last 40 quarters only for last 39 quarters the company is in continuous losses. I hope you have understood how how it impacts a specific stock if the fundamentals are not strong and the stock is driven purely based on news. Well like we saw in the case of TTML right now where the stock surged from barely 7 rupees to directly 291 rupees in a span of 1.5 half year the stock hit back to back upper circuits for quite a long time based only on news but then a stock can not just go up and up forever right then the stock started to go down and down and down because the fundamentals of this stock were not really strong so please make a point very, very clear in your mind please do not invest in any stock not even in penny stocks based only on news, it has to be a fundamentally strong stock because a stock if it has fallen by even 40 percent from the peak it does have a capacity to fall by another 40 percent from that level if it is fundamentally weak.
What are the risks associated with penny stocks
Let’s move on with few more risks which are involved while you are buying penny stocks the very first one is that there is a big gap between the Ask Rate and the bid Rate so typically we call it as a wide bid ask spread now what is this? Seller is wanting to select this level buyer is wanting to buy at this level so there is no match right trade will not take place and this can hamper the volumes so higher the bid asks spread it is not going to be good that will be treated as a risk, second thing is that these stocks are typically not very liquid means what the when you want to sell such stocks you might not always find a proper buyer for that stock and you may get stuck up in such stocks and that is nothing but lower liquidity, third one is that lack of information, now what do I mean by this point? Typically in case of penny stocks you might not find investor presentations, you might not find con calls for such stocks and that is why the information that you are wanting from the stock can be a little bit hard to get and the last one is that many of these penny stocks are into the t2t category that is straight to trade category means what you are not allowed to do intraday transactions so even if you have bought at let us say five rupees and the stock has gone up by few pesos still you will not be allowed to sell on the same day because it’s a t2t category.
how to analyze penny stocks?
You know you will find many friends who will say that array this stock is only of one rupee it will definitely go from one rupee to two rupees and if you ask that person why you feel it will go from one rupee to two rupees and he will be like I just feel that it will go from one to two that can’t happen, you should have done a proper fundamental analysis and then you should have decided whether you are going to invest in this stock or not but exactly fundamental analysis means what? what are some five basic points that you need to check? Number one you should check the business model do you find their business model promising not only based on that specific company just try to see whether that business model is in line with the industry needs and with the overall economy needs as well, second thing you can also do on management analysis for that stock, the third thing you can try and see what is the management’s vision what is their mission what
are their different objectives for the company you can also try and check the shareholding pattern of the company because initially if the promoters themselves do not have a lot of stake in the company, they might not be that much motivated to grow the company bigger to the next levels next one you can also check the financial ratio something like ROE, ROCE the sales growth, profit growth.
misconceptions or fallacies about penny stocks
Now let’s move ahead with three misconceptions or fallacies about penny stocks:
- The very first one is that any listed stock was once a penny stock, now with this many people feel that any company which is listed on the stock exchange was somewhere below 10 rupees Once Upon a Time, and today it might be in some hundreds or in thousand rupees that is not the case many stocks get listed on the stock exchange as a large cap itself latest example can be of LIC which got listed on the stock exchange hardly six to eight months ago and that got listed as a large-cap stock right so the first misconception is clear.
- The second misconception is that a stock which is let us say of one rupee can easily go up to two rupees why and only it has to go up by one rupee only do not calculate these returns in terms of absolute numbers try to calculate the returns in percentage terms if a stock were to go from one rupee to two rupees it is a hundred percent return it is saying something like a 10,000 rupee stock if it were to go to 20,000 rupees, now that sounds scary but it is the same because it is again hundred percent returns only so if you feel ten thousand to twenty thousand is difficult similarly even going from one to two is also difficult.
- The third fallacy or misconception is that TA works very well on any stock chart typically what I have seen with my personal experience is that TA typically does not work that well on penny stocks simple reason being that such penny stocks keep on hitting upper and upper circuits followed by lower and lower circuits, even if such stocks show a good chart pattern and even we see some breakout typically the volumes are on a lower side so a breakout is not that convincing and that is why the chances of failure are pretty high.
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whether to invest in penny stocks or not? The final thing is that we are human beings and when a stock starts going higher and higher and higher we feel that I should invest in that stock but then if you are getting that my personal suggestion would be that invest only party fund amount, see ideally not to be invested but if you are getting that pattern maximum is what only your party fund amount then you will be like balance major chunk of money where should we it where should it be invested obviously it has to be invested only and only in fundamentally
