Today we will talk about penny stocks in which people expect that even 2 rupees stock can go upto 2000 and beyond. Penny stocks term was first used in US market. Any share price which is below one dollar was termed as penny stock. It means in less investment more profit. But if this stocks work in this way we will find it out.
Example of penny stocks
You may hear about successful investor Rakesh Jhunjhunwala. He got a lot of money in investing in a penny stock company name Titan in his early life. He bought 3 rs per share of this company in 2003. At present this is up 1500 percent than that price. You may hear some other stories where some thousands investment in a penny stock turns into lakhs and crore rupees.
What are penny stocks
In Indian context the stock price, which is below 5 rupees are known as penny stocks. Some of the stocks are traded below one rupee in Stock Market. Some people tend to invest in those companies thinking they will get so much share in very few money.
Popular stocks like TCS, HUL, nestle are almost higher than 10 k rupees which is unaffordable for most of the retail investors. Some investor think they are already trading in high price, how far there price can go? So they choose some unknown penny stocks over popular known stocks thinking they can get huge profit from these.
Actual story of penny stocks
But we will tell something interesting about this penny stocks which may you never hear. In the first example we see that those 3 rs titan stocks become 1500 rs seeing in the google chart. But actually it was not the case. In that time the titan share was trading at about 60 rs.
This confusion occurs as we are not considering the stock split. In stock split company divided their shares some years. First we need to understand why company split their share. Suppose if any stock price rises more than 1 lakh rupees, then this share will be unaffordable for many investors. So they splits their stocks so that retail people can purchase the stocks.
System in US
There is no problem in US market regarding this. People of US can buy fractional shares there. So if you find some us popular stocks like Alphabet, Amazon or Facebook you will find the price of the stocks of these companies are above lakh rupees. By this rule you can invest in google/amazon stocks in just 1 dollar whatever the actual price of full stock. But this facility is not available in India. So company have to split their stocks to be in affordable range.
Live Example
If you notice you will find that every IPO of every company, the stock price are in range of 100 rs to 1000 rs. So now think how can price of some stocks be in such lower prices less than 5 rs. If anything occurs like recession, covid 19 or world war stock market hardly falls 50 -60 percent, not less than that. But the price of penny stocks falls even 90-99 percent.
Final words:
So now you understand stock price of any company become less than 5 rupees when the company was caught in any scams or their promoter left the company or the business model of company does not work now or the company only has loans to repay in the balance sheet. In short, these company become so risky.
So most of the newbies in stock market get in this penny stocks trap influenced by some selfish influencers. So don’t think whenever a share is high it can`t go to higher prices. Also start to realize this penny stock companies are not multi bagger.