Stock / Share Market
by 5paisa Research Team Last Updated: 2023-02-01T11:23:06+05:30

Introduction

One of the most common myths of share and stock trading is that you need a big, fat budget to start. In truth, there are all kinds of investors out there - some with big budgets, and others with big ambitions. There really is no minimum investment in share market; you can buy stocks worth ₹1,00,000 on SENSEX, or you can also buy shares well under ₹10 in other low-cap companies. The game lies in the risks you are willing to take, for there is a relatively lower (but high nevertheless) risk in buying high-value shares rather than ultra-penny stocks.

Even though ultra-penny stocks involve high risks, they still carry the potential to deliver multibagger trades - if you are willing to challenge a wider bid-ask spread, a limited to nonexistent market liquidity of the stock and an investor pool you can count on your fingers, that is.

With that said, there still are significant upsides to minimalist stocks. Let's start by understanding what penny stocks are, to begin with.

Why do Penny Stocks Trade at Low Cost?

Ultra-penny stocks belong to companies and outfits that don't have a high value in market capitalization. That, in combination with limited information regarding the company's future (its growth, prospectus, profitability/revenue trajectory, etc.), causes investors to keep their distance from such companies. A majority of low-cap companies don't even float an estimate in the market - which further brings down the value of their shares.

Another factor that causes the value of penny stocks to stay low is quick stock offloads. The moment penny stocks rise to a certain value, stock operators or traders who own penny stocks quickly sell them off, bringing their value down further. This short-term life of penny stocks somehow tends to keep the retail investors away from them, removing any opportunity to bull their share prices higher than they are.

While they are volatile and fungible in nature, ultra-penny stocks are good for short-term investments. Investors seeking short-term, quick profits tend to invest more in these stocks. On the other hand, long-term investors prefer more to perform their due diligence on companies before buying their stock - which casts the low-cap companies out of the loop.

Pro-Tips for Trading in Ultra-Penny Stocks Valued Under ₹10

Venturing into minimalist trading isn't a bad idea, provided you are familiar with what you are getting into, and what you need to do to stay as safe as possible. Here are some pro-tips to invest in stocks under ₹10.

Look Before You Leap

Not all ultra-penny stocks are promising. Some do perform - however, you need to prepare yourself with data and some analytics to park your money with these penny stocks. Do thorough research on the market fundamentals of the penny stocks you want to invest in. See if the company owning that stock shows some promise.

Be Your Own Man

When deciding to put money where there is a high risk, it is understandable that you'd look for some guidance and advice. However, it is important to bank on your own research and judgemental faculty as much as possible. There is already very little information available on penny stocks, and the last thing you would want to deal with is unsolicited advice from dubious/untrustworthy sources.

Consider The Probability of Dilution

Low-cap companies often release more shares in the market with a view to increasing the capital. When that happens, the existing value of shares gets diluted among the existing and new shareholders. It also brings down the share value - you don't want that happening with the money you pooled into ultra-penny stocks. Extrapolate your data with market trends to predict whether the company you are willing to invest in would consider releasing more shares.

Know The Risk

Making a quick buck from ultra-penny stocks is inherent with many risks. Given that they are super-sensitive to volume and one push away from plummeting into nothingness, you need to be fully willing to face the associated risks and prepared to handle the aftermath.

If you are unwilling to take such risks while investing, there are other places you can park your pennies and let them grow. Let's check out some alternatives.

Alternatives to Ultra-Penny Trading

Not many people are willing to take the risks involved with ultra-penny funds; if you are one of them, here are some alternatives.

  • Start an automated savings program. Put away some money every month into programs like Mutual Funds, or Systematic Investment Plans, which give you great returns in the long run.
  • Save for your retirement. Consider stashing away some money semi-annually into FDs or Post Office saving schemes.
  • If you are still employed, you may consider investing the returns you receive after filing for income tax and GST. Consider purchasing the low-risk T-Bills and bonds for the long term.

Conclusion

Ultra-penny stocks either shoot for the stars or sink to the bottom of the ocean. When neither of these happens, they yield very little returns. Be thorough in your research and prepared to take the fall when you invest in this volatile niche.

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