Before investing in penny stocks, it is particularly important to understand they are low on a range of parameters:
Pricing
For a stock to be categorized as a penny stock, it needs to be dirt cheap, essentially the price of a penny that is one-hundredth of a U.S. dollar. In India, the price of penny stocks in India ranges mostly between INR 10 – INR 20. Penny stocks as low as INR 1 are also available for trades.
Market capitalization
The market cap of penny stocks is generally quite low. In some cases, stocks that have suddenly fallen in value due to debt issues or corporate governance challenges end up in the penny stocks category. In India, the majority of penny stocks have low to moderate market cap.
Liquidity
An important feature of penny stocks is the low liquidity that they offer. This means the trader may not be able to buy or sell the penny stock of their choice at all given times—this makes investing in penny stocks riskier owing to their illiquidity.
Historical information
Many penny stocks are stocks of companies with limited historical information, which implies that the investor may not be fully aware of the company’s operations and future prospects may not be very transparent. This, however, is not the case with all penny stocks.
