What are Penny Stocks ?

 

What is a Penny Stock ?

Definition:

 Penny stocks are those that trade at a very low price, have very low market capitalisation, are mostly illiquid, and are usually listed on a smaller exchange. Penny stocks in the Indian stock market can have prices below Rs 10. These stocks are very speculative in nature and are considered highly risky because of lack of liquidity, smaller number of shareholders, large bid-ask spreads and limited disclosure of information.

Description:

 In western markets, shares that trade below $1 are usually called penny stocks. But this basket also includes stocks priced under $5. Penny stocks are highly risky, but some of them also have the potential of turning a small investment into a fortune. For example, if you own 50,000 shares of a penny stock priced at $1, even a $1 rise in the share price can give you $50,000 in a single day. This is not possible in the case of a large stock, because it would require large capital to buy such a large volume of shares. There are a lot of downsides to penny stocks too, as they are prone to price manipulations, sudden delisting and regulatory scrutiny. One can move the stock by buying thousands of shares and create a spike without leaving any cue for the average investor to know whether the spike in price is genuine or manipulated. Also, penny stocks are more prone to scams, as they are often not regulated by a national-level stock exchange. Because of all these risks, stock exchanges put these types of stocks in a different category, called as trade-to-trade basket. In this category, no intraday share trading is allowed. Transactions have to be compulsorily settled on gross basis, which means you must deliver the shares on the same day if you have sold them or take delivery if you have bought them. 

Credits : EconomicTimes