Investing in penny stocks

The first question is 'To invest or not invest' in penny stocks. This is largely a personal decision that reflects your risk profile. If have the capacity as well as the nature to take greater risks, you could be looking at penny stocks. If your financial position is not very strong, and you have little spare money to invest, it is better that you keep off penny stocks altogether and look at established stocks only. Similarly, even if you have a lot of money to spare but are generally averse to taking risks, it is better that you don’t invest in penny stocks. If you are the kind of person, who likes to take risks in order to increase your returns, and can afford to lose some money if it comes to that, then you could look at penny stocks.

Once you decide to invest in penny stocks, you should take care to ensure that your investment has a reasonable chance of giving you good returns. For this purpose, you should look at a number of things such as the reputation of the company and its promoters, past history if any is available, and also assess the fundamentals. Finance Managers and accountants use the term fundamentals to refer to the intrinsic value of a company. The prices quoted in the share market are the result of many factors such as market sentiment. The fundamentals of the company on the other hand will show you what the company is actually worth. This consists in understanding the real value in terms of the assets and the revenues of the company.  If you invest in a company with good fundamentals, the chances of your losing will be greatly minimized. Use the methods of valuation of shares discussed in the earlier articles for t his purpose.

Another golden rule that is applicable to all shares, but particularly true in the case of penny stocks is the old adage, 'Don’t put all your eggs in one basket'. This is true even if you have inside information. Inside information refers to private information that you possess about a company that is likely to affect its share value in the short run to a major extent. For example, if you knew that company A is likely to be taken over by a major conglomerate offering a high price to the existing stockholders, and if this is not yet known to the general public, you have inside information. You have information that makes you pretty sure that the share price will raise in the market substantially once this fact becomes known. So it is usually safe to act on inside information, assuming of course that it is reliable and true. However, even in such cases you should avoid over exposing yourself, particularly in the case of penny stocks. Plans simply fail to materialize, for example, in which case you may be left holding a stock that has little value. Remember that there’s “many a slip between the cup and the lip”.

The next important thing to keep in mind while considering penny stocks is that you may not be able to sell them quickly, particularly if you have a large quantity. So if short-term liquidity is a concern for you, you should avoid investing in penny stocks. It is much easier to sell stocks that are traded on a regular stock exchange and ones that are well known and frequently traded.

To conclude, remember that penny stocks carry greater risks and less liquidity. Avoid over exposure. Invest after investigating. If you follow these rules, are careful, and lucky, you may make a good profit from penny stocks.