I heard the word ” penny stocks ” for the first time when I watched the movie ” Wolf of Wall Street”. I would have heard it earlier, but hearing it again in the movie was a lightning strike. And I had no idea what penny stocks were, but I understood it made Leonard DiCaprio turn his life around in that movie.
After 2 years in 2015, young me with a few savings in hand trying to learn about the share market with a small investment. Back then I was very vigilant in buying stocks. I would buy only stocks that are known to me, like TCS, Reliance, and ITC. Companies that are famous and shares where everyone invested.
And penny stocks ??? well that was a big no-no for me. Why? because it has huge risks. That was the advice from my fellow mentors. I was like okay, let’s follow the advice since I am an amateur to share market.
After few years into the share market, you naturally grow the confidence and you try to learn new things in the share market. So, my new task was to learn about penny stocks.
Why they called it penny stocks ?? well it’s simply because they are cheap to buy. You would not believe, the whole share market trade on the cream layer or the top stocks in the share market. That is close to 13 -15% of the stocks, the traders buy and sell only the top 500 companies in the share market.
Penny stocks are good shares that have the potential but undervalued. More traders in the share market are gamblers who follow the basic principle, but few traders who learn the fundamentals, bet big on penny stocks, and make a killing out of it.
You cannot buy penny stocks just because they have a low price. You should do enough study to make sure you are buying a stock that is undervalued. Now how to do that ?? by analyzing the stock data.
You can select the penny stock by following criteria.
Business – Are they doing a business which is profitable and long term ??? See the category of business.
Profit – Is it a profit making company ??? Check their last 5 years profit from the books.
Debt – Do they have any debts ??? how to check ?? check heir current debt and net worth, a growing company will always low debt and high net worth,
Dividend – Are they paying any dividends ???
These are the basic information which we have to check before selecting the penny stock.
After the initial screening of the penny stock and selecting the company , we should go deep into their fundamentals.
EPS ( Earning Per share ) : See the earning per share for the last 5 years , are they making any growth ?
P/E Ratio : See the last 5 year PE ratio. is it in the growing trend or in the decreasing trend.
If you ask me this analysis also done for other stocks, yet why these stocks are at a lower price. These stocks are lower priced because of few reasons.
These companies are not famous and less reputed. They have less market capital and celebrity investors dont invest in it. Once the penny stock gets attention then these are no more penny stocks.
For example Reliance is reputed company , if reliance starts a small company and issues an IPO, there are buyers to buy the shares. Because, you know its a reliance company.
So the penny stocks are the companies which has good fundamentals yet under valued for various factors.
Most of the advice I give on stock is for the long term, penny stocks are the best for the long term yield of more than 100%. Why I say penny stock because it is cheap to buy. Every common man can afford to buy a penny stock and see a considerable profit. Learning about the stock market needs little effort, it’s not rocket science, it just needs an effort.
Keep your stock portfolio with both large market cap stocks and penny stocks.
I want all my readers to have some small investment in the stock market and start learning.
Before buying a stock, follow the stock , see how it is performing , read news about it . When it hit higher or lower price, be curious and know why. All these little learning are the steps to make money.
You should invest only in what you are confident about, and you will get confident by only knowing about it.
