Stock market investment can help reach your financial goals for the lifetime, but it can be expensive to begin with. Some stocks cost hundreds and some costs thousands of rupees per share, you can easily spend thousands of rupees building a diversified portfolio. Stocks that trade at a very low price, as well as have low market capitalization, listed on a smaller exchange, and are mostly illiquid are called penny stocks. These stocks in the Indian financial market can have prices below Rs 10. These stocks are highly predictable in nature and are considered extremely risky as they lack liquidity, smaller number of shareholders, large bid-ask spreads and limited disclosure of information.
Penny stocks may appear an affordable alternative, as these investments typically cost very less per share. If you are investing on a budget, you can’t beat those prices.
However, there are risks involved in buying penny stocks. If you're trying to become rich with these stocks, there are a few things to keep in mind.
Do penny stocks really make you a millionaire could be a big question to answer, so before that we should look at these three factors related to penny stocks.
Penny stocks can be highly volatile
All stocks have potential of volatility, but penny stocks have more than other stocks. The companies that issue penny stocks are generally smaller in business size and unable to trade on traditional stock exchanges. Also, smaller businesses are in general more volatile than their larger competitors.
Penny stocks repeatedly experience price swings, say day-to-day, which can be a stressful time for investors. If you have invested a lot of money in penny stocks and their prices plunge overnight, you would see a harsh dent in your investment portfolio.
You will find difficulty to sell penny stocks
Penny stocks also have lesser liquidity than traditional stocks, which adds risk to their investing scenario. There are only a few investors who show interest in buying them, so if you choose to sell your stocks, you may have difficulty getting the right investors. If no one shows interest in buying your shares, you’ll have to hold onto them until they are sold.
Since it is a fact that penny stocks are highly volatile, their lack of liquidity will be financially detrimental. If you are not able to sell your stocks right away, the stock price could sink before you could offload your investment. This may lead to selling those shares for a steep discount, thus locking your losses.
A better alternative to penny stocks
One of the biggest positive things about penny stocks is their affordability. The good news is that there is a way you can invest in big-name stocks without paying high, like fractional shares. These shares allow you to buy a small slice of nearly any stock for a fraction of its listed share price.
To make money through stock market investment, you should go with strong companies and hold their shares for the long run rather than investing in shaky stocks as they are affordable. Fractional shares would be a decent selection, allowing you to get solid stocks without spending too much.
Penny stocks won’t make you a millionaire, so you must think twice before investing in these shares.
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