<p>Penny stocks are stocks that sell at very low prices. Typically, these are stocks selling below Rs 10 per share and belong to companies with extremely low market capitalisation.</p>.<p>While the low price of these stocks attracts investors, picking the right penny stock for your portfolio needs some experience. Further, these stocks are not highly liquid leading to a huge bid-ask spread. Hence, they are considered riskier than regular stocks. However, fundamentally strong penny stocks have the potential to turn into multibaggers and reward steadfast investors.</p>.<p>So how do you know if a penny stock is worth it? Here is a simple step-by-step guide to help you pick winning penny stocks for your portfolio</p>.<p class="CrossHead"><strong>How to choose penny stocks</strong></p>.<p><strong>Step 1.</strong> Assess your risk tolerance and determine if you will be comfortable with the high risks associated with investing in penny stocks. If not, turn away and look for other investment avenues.</p>.<p><strong>Step 2</strong>. A penny stock investor cannot succeed unless he has a good understanding of the stock markets. These stocks react strongly to even the smallest macroeconomic or political event. Hence, an investor with an understanding of the way these events impact the stock markets is better-equipped to pick the right penny stock.</p>.<p><strong>Step 3</strong>. At any given time, stocks of small-caps or lower form more than half of the stock market. Hence, you need a strategy to identify the ones with the best potential to turn multi-baggers. A top-down approach is usually recommended for investing in penny stocks. Here are some tips:</p>.<p>a. Start at the top and see how the economy is performing. An economic slowdown usually spells doom for such stocks.</p>.<p>b. If the economy is thriving, then identify industries or sectors that are performing beyond expectations. The idea is to identify winning sectors with the assumption that all companies in the sector will benefit from boosted performance.</p>.<p>c. Identify a list of small companies from a sector that looks exciting based on your research.</p>.<p>d. Weed out names that have some fundamental issues and try to arrive at a shortlist.</p>.<p><strong>Step 4</strong>. Once you have the shortlist ready, don’t start investing immediately. Instead, create a hypothetical portfolio of the shortlisted stocks and track them like in the real market. If the prices rise, then determine the right time to sell them. Do this for a few months to fine-tune your process.</p>.<p class="CrossHead"><strong>Things to avoid while picking penny stocks</strong></p>.<p>With some practice, this simple four-step approach mentioned above can help you pick winning penny stocks with ease. While it might seem simple, there are many factors that can distract you and lead you down a rabbit hole. Here are some factors that you need to be careful of:</p>.<p>Ignoring the value of the stock and focusing on the price instead: Affordable is the term that is often associated with penny stocks. Let’s say that you want to invest Rs 10,000. If you buy a stock of ABC Ltd. worth Rs 5, you will get 2,000 shares! On the other hand, if you buy a stock of XYZ Ltd. worth Rs 10, then you will only get 1,000 shares. Which of these seems like a better option? If you say that investing in ABC Ltd. is better without analysing the fundamentals of the company, then you might be heading for a rude shock. The question that you should be asking yourself is: What is the value of the stock based on the company’s performance?</p>.<p>There are various ways of determining the value of a stock like the book value per share, P/E ratio, CCI pricing model, etc. The market price is merely an indicator of the demand and supply of a stock that can fluctuate due to varying reasons. Hence, before investing in a penny stock, ensure that you evaluate the company thoroughly. </p>.<p class="CrossHead"><strong>Buying stocks of a company that is constantly issuing new shares</strong></p>.<p>Let’s say that a company issues 100 shares to 100 shareholders. Hence, each shareholder has a stake of 1% in the company. However, in a few months, the company decides<br />to raise more funds by issuing another 100 shares to 100 new shareholders. Now, there are 200 shareholders in the company bringing the stake of each shareholder down to 0.5%. Unless the company performs exceptionally well, this will dilute your holding in the company and impact its stock price too.</p>.<p class="CrossHead"><strong>Speculating? Go to Las Vegas instead!</strong></p>.<p>Buying penny stocks is not about ‘guessing’ the right ones. It is a strategic approach to finding stocks that are undervalued by the stock market and the company has the potential<br />to grow. When you come across a penny stock, the first question in your mind should be – Why? Why is the stock selling so low? If you can’t find answers to this basic question, then<br />investing in it is mere speculation or a gamble. And, we all know the most probable outcome of gambling, right?</p>.<p><em>(The writer is Co-founder and COO, Groww)</em></p>
<p>Penny stocks are stocks that sell at very low prices. Typically, these are stocks selling below Rs 10 per share and belong to companies with extremely low market capitalisation.</p>.<p>While the low price of these stocks attracts investors, picking the right penny stock for your portfolio needs some experience. Further, these stocks are not highly liquid leading to a huge bid-ask spread. Hence, they are considered riskier than regular stocks. However, fundamentally strong penny stocks have the potential to turn into multibaggers and reward steadfast investors.</p>.<p>So how do you know if a penny stock is worth it? Here is a simple step-by-step guide to help you pick winning penny stocks for your portfolio</p>.<p class="CrossHead"><strong>How to choose penny stocks</strong></p>.<p><strong>Step 1.</strong> Assess your risk tolerance and determine if you will be comfortable with the high risks associated with investing in penny stocks. If not, turn away and look for other investment avenues.</p>.<p><strong>Step 2</strong>. A penny stock investor cannot succeed unless he has a good understanding of the stock markets. These stocks react strongly to even the smallest macroeconomic or political event. Hence, an investor with an understanding of the way these events impact the stock markets is better-equipped to pick the right penny stock.</p>.<p><strong>Step 3</strong>. At any given time, stocks of small-caps or lower form more than half of the stock market. Hence, you need a strategy to identify the ones with the best potential to turn multi-baggers. A top-down approach is usually recommended for investing in penny stocks. Here are some tips:</p>.<p>a. Start at the top and see how the economy is performing. An economic slowdown usually spells doom for such stocks.</p>.<p>b. If the economy is thriving, then identify industries or sectors that are performing beyond expectations. The idea is to identify winning sectors with the assumption that all companies in the sector will benefit from boosted performance.</p>.<p>c. Identify a list of small companies from a sector that looks exciting based on your research.</p>.<p>d. Weed out names that have some fundamental issues and try to arrive at a shortlist.</p>.<p><strong>Step 4</strong>. Once you have the shortlist ready, don’t start investing immediately. Instead, create a hypothetical portfolio of the shortlisted stocks and track them like in the real market. If the prices rise, then determine the right time to sell them. Do this for a few months to fine-tune your process.</p>.<p class="CrossHead"><strong>Things to avoid while picking penny stocks</strong></p>.<p>With some practice, this simple four-step approach mentioned above can help you pick winning penny stocks with ease. While it might seem simple, there are many factors that can distract you and lead you down a rabbit hole. Here are some factors that you need to be careful of:</p>.<p>Ignoring the value of the stock and focusing on the price instead: Affordable is the term that is often associated with penny stocks. Let’s say that you want to invest Rs 10,000. If you buy a stock of ABC Ltd. worth Rs 5, you will get 2,000 shares! On the other hand, if you buy a stock of XYZ Ltd. worth Rs 10, then you will only get 1,000 shares. Which of these seems like a better option? If you say that investing in ABC Ltd. is better without analysing the fundamentals of the company, then you might be heading for a rude shock. The question that you should be asking yourself is: What is the value of the stock based on the company’s performance?</p>.<p>There are various ways of determining the value of a stock like the book value per share, P/E ratio, CCI pricing model, etc. The market price is merely an indicator of the demand and supply of a stock that can fluctuate due to varying reasons. Hence, before investing in a penny stock, ensure that you evaluate the company thoroughly. </p>.<p class="CrossHead"><strong>Buying stocks of a company that is constantly issuing new shares</strong></p>.<p>Let’s say that a company issues 100 shares to 100 shareholders. Hence, each shareholder has a stake of 1% in the company. However, in a few months, the company decides<br />to raise more funds by issuing another 100 shares to 100 new shareholders. Now, there are 200 shareholders in the company bringing the stake of each shareholder down to 0.5%. Unless the company performs exceptionally well, this will dilute your holding in the company and impact its stock price too.</p>.<p class="CrossHead"><strong>Speculating? Go to Las Vegas instead!</strong></p>.<p>Buying penny stocks is not about ‘guessing’ the right ones. It is a strategic approach to finding stocks that are undervalued by the stock market and the company has the potential<br />to grow. When you come across a penny stock, the first question in your mind should be – Why? Why is the stock selling so low? If you can’t find answers to this basic question, then<br />investing in it is mere speculation or a gamble. And, we all know the most probable outcome of gambling, right?</p>.<p><em>(The writer is Co-founder and COO, Groww)</em></p>