Investing in the stock market offers a wealth of opportunities for your capital to grow. You can use a variety of tools to trade and earn rewards. Experts often recommend developing a long-term return strategy and investing accordingly. You can invest in quality stocks and other investment vehicles to build a solid portfolio and build a healthy body over the long term. In addition to this, there are market segments that you can try to multiply your returns in a very short period of time. One such area of investment is penny stocks. In this article, we will learn all about penny stocks, what they are and what are the best penny stocks 2022.
What are penny stocks?
As the name suggests, penny stocks are stocks that trade at very low prices on the stock exchange. While there is no specific definition of how low a stock needs to be to be called a penny stock, it can be anywhere from 0 to 10 rupees or even 20, 30 rupees. They are usually inexpensive and can be purchased in large quantities with very little capital. The best penny stocks are those that give you multiple returns, which is why they are often called multiple penny stocks. But why are we even talking about stocks like this? Let’s go through the main characteristics of penny stocks to better understand what they mean.
Central thesis:
- Penny stocks have the potential to provide multiple returns in a short period of time
- Low liquidity and high volatility are key risks associated with penny stocks
- With proper investment strategy and risk management, you can also increase the chances of penny stocks winning
- Diversification is important when buying penny stocks
- Use only a fraction of your money to buy penny stocks
Characteristics of penny stocks
Here are the key characteristics of penny stocks:
Low market price
As mentioned earlier, by definition, a penny stock is one that is available and has a relatively low market price. Also based on price, penny stocks are arbitrarily divided into different price classes such as penny stocks under Re 1, penny stocks under Rs 10, etc. The reason for the low price is the low market capitalization of the company. However, their prices haven’t stayed low all the time. Some penny stocks can appreciate significantly in value and move out of so-called multiple stock classes.
High volatility
Penny stocks are also known for their high volatility. Penny stocks are most popular with those looking for short-term gains and are often bought and sold in bulk by large traders. For example, you can buy 10,000 units of Re 1p shares for just Rs 10,000. Buying and selling such cheap stocks in such a large amount can create extreme volatility. Because of this, the price of penny stocks has changed a lot in unexpected ways. For the same reason, penny stocks are generally considered very high-risk investments.
Low liquidity
This is another risk factor for best penny stocks 2022. They are often very illiquid and can put traders in situations where they cannot find enough buyers to sell their inventory or not enough sellers to offset short positions.
High return potential
The only reason we’re still learning and caring about reading penny stocks is because it could be the reason someone’s self-made story. The best penny stocks list is filled with many stocks that have grown exponentially in a short period of time. As we read above, these stocks are called multi-bag penny stocks. We can understand this with an example: Suppose you bought 5,000 shares of Re 2 and spent a total of Rs 10,000. Even if the share price goes up by 50 paise and the market capitalization is Rs 2.5, you can still make a profit of Rs 2,500 or 25%. This is normal in best penny stocks 2022. 25% is nothing, penny stocks can return 300%, 400% or even 1000%+ in a very short period of time.
Your chance to get your favorite tomorrow at a low price
A string of best penny stocks 2022 quickly became market darlings after initially being ignored by investors. One of the most valuable companies by market cap has a vivid example – Adani Green. The company was listed at around Rs 50. In less than four years, the share price has topped Rs 3,000, an increase of about 6,000%. Not only does this provide a lucrative return for early investors, but it also sets the company apart from the big behemoths.
Learn Fundamental Analysis for Free
If you want to be the next big bull and test your fundamental analysis skills somewhere, there are only best penny stocks 2022. Pick 50 of the best penny stocks with sound fundamentals, do a thorough fundamental analysis of these companies, and invest in companies that you think will be bulls in the future. Even if you see 1 in 10 stocks match your expectations, you’ll feel more confident about your trades. Only stocks with solid fundamentals can be longs, and with a solid understanding of fundamental analysis, you can easily filter these stocks.
The benefits of investing in best penny stocks 2022
Obviously, the main benefit of investing in penny stocks is their ability to generate higher returns in a short period of time. All your other benefits are about this. Let’s find out.
Ability to rotate multibagger
Many penny stocks have proven bullish in the past, and stories like this come out of the penny stock community from time to time. Shares that traded below Rs 5 a year ago are now trading at Rs 500, which is normal among penny stocks.
The Golden Secret of Penny Stock Investing
When we understand the benefits of investing in penny stocks, we should also make it clear that penny stocks have an equal or greater chance of not appreciating in value. Penny stocks have extremely low success and failure rates. Low liquidity, high volatility and lack of understanding of the company create higher investment risks.
But there are ways you can take the risk of investing in penny stocks and still reduce your risk, right? Let’s study briefly.
Penny stocks: Don’t put all your eggs in one basket
The famous diversification rule also applies to investing in penny stocks. However, it is not primarily used to reduce risk, but to increase the chances of winning. Use a low stake (no more than 2-3%) of your total investment to invest in penny stocks. For example, with a total investment capital of Rs 1 million, you can keep Rs 20,000 to invest in penny stocks. You can use this 20,000 rupees to buy 4000 penny shares at 5 rupees (high and safe in the case of penny stocks). Instead of buying 4,000 units of a single stock, you can now buy 500 units of eight different penny stocks.
Even if two out of eight become multisackers, it will make up for the loss of the other six. Assuming a 10x increase in price for both stocks, they will only give you a profit of Rs 45,000, which is more than double your start-up capital.
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