ou have found some stocks trading at just Rs.5 or 10. What an opportunity? There must be blind people to leave these stocks unnoticed. I will profit from them. It can easily double or triple.
If this is your thought then that is exactly ‘Penny Stocks Investing‘. But is this rational? Let us find out….
I have a friend who bought a lot of Birla Power Solutions and Jupiter Biosciences in 2009. These were really hot penny stocks in late 2008. Let me tell you that he regrets his decision now. They have gone way down.
Are you gung ho about buying top penny stocks? You’ve made up your mind already? While I would certainly advice to invest in top quality stocks, here are a list of top low cost shares to invest in 2017-2018. How did we select them? The criteria we used for choosing best penny stocks was…
We made sure they’re not companies that vanish overnight. They must have been around a few years
They may not strictly be penny shares but border around them. Ie., each shares costs less than Rs.25 and market Cap less than 500crores
Their products/services must be real and visible
Must have some downside protection in short-term
Promoter holding must be 40% minimum
By this way we can at least make sure to screen the majority of bad companies (which most penny stocks usually are). Here is the list of top penny shares in India that meet above criteria
SL.No Penny Stock Name Price Market Cap(in Crores) P/E Ratio P/BV Div Yield(%)
1 IL&FS Invest. Mgrs 22.4 720.1 13.1 6.95 5.65
2 JVL Agro Industries 16.9 287.1 4.3 0.61 1.17
3 NeoCorp International Ltd. 15.4 59.3 3.01 0.23 3.21
4 Genus Power Infrastructure 25.3 678.2 11.21 1.22 0.38
5 Vijay Shanthi Builders 13.8 36.4 7.85 0.3 5.76
6 Manali Petrochemicals 10.7 184.3 5.92 0.87 4.66
7 Nitesh Estates 13.9 203.3 21.4 0.47 0
8 Manappuram Finance 67 6400 10.2 2.13 2.7
9 Lycos Internet 18.5 881.2 2.21 0.48 0.0
1) IL& FS Investment Managers – This is a very good company managed by IL&FS group. They are involved in Private Equity business and are the only listed PE firm in India. IL&FS has a strong brand equity. The last value of stock was around Rs.21 . It gives a very good dividend and has no debts. While you cannot expect it to triple or quadruple in next year, it is somewhat a decent stock to buy in at low cost per share.
Update: This penny stock paid Rs 1.3 as dividend ie., 7% of cost price. It is also down by Rs.2. The decent fundamentals are still intact.
2) JVL Agro Industries – It has a Market Cap of around Rs.200 crores and trading at around Rs.15 per share. It has P/E of 4 and book value of Rs.15. JVLis the largest single in-house manufacturer of Vanaspathi Oils. It has a dividend yield of around 1.5%
Update – This penny stock has moved from Rs 16.9 to Rs 20.5. Not great performance but not bad either.
3) NeoCorp International Ltd – Neo Corp is a packaging provider expecially in textile manufacturing. It manufactures under PackTech brand. It has a market cap of around Rs.60 crores and per share costs around Rs.15. The PE ratio is close to 2 and dividend yield is 4%.
Update:The market cap of this penny stock has doubled in last one year after featuring first on our list. It now trades at Rs31.
4) Genus Power Infrastructure – This is one of the leading electricity meters manufacturer in India. Have moderate debt on their books. The stock costs around Rs.21 and the market cap is around Rs.500crore. The PE ratio is around 9 and promoter holds around 50%. Earns around Rs70 crore profit every year. Decent fundamentals.
Update: This penny stock has gone up to Rs 46 now from Rs 21 when we first listed it. More than doubled.
What are Penny Stocks?
Penny stocks are shares of companies that have market capitalization (market capitalization-the total value or worth of the company) less than Rs.100 crore and each share trading below Rs.10. Do you know how many penny stocks trade on BSE or NSE. It’s 25% for the BSE and 10% for the NSE.
They look like a good grab as the downside seems limited. Penny stocks usually belong to companies with low quality management or negative future outlook. These penny stocks suddenly spring to life with huge volumes when there is an announcement or turnaround in the market.
Why are penny stocks cheap?
Most Penny stocks are cheap for a reason. It is mainly because
They have a low quality management
Non-transparent corporate governance
bad future business potential
Bad balance sheet and bad profit/loss account
Penny stocks usually seem to belong to dubious promoters. These promoters sell their unworthy financial companies during the peak period. Once they have off loaded their junk, they slowly disappear from the light. The investors then get stuck with the bad investments.
How do penny stocks operate?
Penny stocks usually have a promoter-operator nexus. The promoters usually hire investment bankers (low reputed mostly). These people in turn negotiate a deal with the operators who buy and sell shares anonymously with fake accounts. During boom times, people are ready to buy anything.
These operators carefully create a media frenzy or approach individual investors by mail/phone. They artificially push up prices and then offload these equity shares to investors. The profit is then shared between the promoter and operator.
Investors would have no idea as to what or how much shares were insider traded nor how long stocks were held. How many of you read the News and Announcements from BSE/NSE before buying penny stocks?
Risks in Penny Stocks
You buy a stock thinking it will go up in future. If it has a stealthy management, you do not know its real profits. Will you lend to a friend who lies all the time? It is something similar to that
There is a chance to lose 100% – The promoters can never return and your stock value goes from Rs4 to Rs 0. Yes it is a 100% loss.
Your stock may be de-listed – BSE/NSE once a while, delists penny stocks to clear the bourse. Once it is de-listed you do not have chance to sell it.
The trade volume value is too thin – You do not get a chance to exit as the value of shares traded is not uniform. It is big on some days and then zero on others. You cannot exit when you want.
Penny stocks are not traded widely. Some may be only delivery-based and not intra-day trading.
Penny stocks in India are not regulated. Most of them run risk of being delisted by bourses as seen in recent months due to low quality. Liquidity will be an issue for such penny stocks as you can’t sell them. So be careful on which stock you buy.
Pros of penny stocks:
If identified properly, the rate of return is huge. As high as 200-500%
Some quality companies , due to temporary hiccups and bad environment end up as penny stocks. Once market and economy turns they bounce back giving super-normal returns.
They are cheap. So you can buy large quantities.
How to trade penny stocks
If you have decided to get involved in penny stocks, make sure you follow these tips. This will help you avoid the major blunders that penny stock investors make.
Don’t trade OTC stocks. OTC or Over -the-Counter stocks are not well regulated as regular listed penny stocks
Do own analysis and discard email/sms which promise you the next million in trade. They make you gullible targets
Look for momentum in the stock. Learn some basic technical analysis.
Try not to short penny stocks. They usually lead to losses unless you’re well aware of technical analysis and insider/market information
Always have your stop losses in place. Don’t invest more than 5%of your total stock portfolio in a penny stock
Choose high volume stocks. The total quantity of stocks traded each day must atleast be 10-15 times what you plan to buy. There is no use buying a penny stock which you can’t sell.
Don’t buy penny stocks just because they’re cheap. Look for decent fundamentals atleast. May not be even greta or good but the penny stock should not be fraud or bad which is case most of time.
Check if the business of the penny stock company is turning around or will turn around. Avoid loss making companies that reported loss for 2 0r more years. Should have visible signs of recovery. Else there is no trigger for the penny stock. Do you know Marksans Pharma, Uniply industries were penny stocks in India once trading at 5rs each. now they trade Rs 100 and Rs 700 respectively.
Don’t try to average the price of a penny stocks on its way down.
Don’t have 50 penny stocks. If you invest in penny stocks then better to have less than 5 or 10 so that tracking is easy.
Following the above measures will protect the downside of your investment. If there is a mistake,then you can book a loss without losing 100% capital if you’re alert.