Last Updated: Sunday, December 20, 2015

How to Invest in Penny Stocks for Multibagger return?

What is a Penny Stock?

The term “Penny Stock” has developed with the stock market, Going in past, “Penny stocks” were the stocks which traded for less than a dollar per share, however, in Indian stock market practice it simply refer to all shares trading below Rs. 20/-. Read more Penny Stock Definition at Investopedia.

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Before we discuss on present topic "How to invest in Penny Stocks"  our first and STRICT WARNING is we would not sincerely advise you all  'investing or trading in penny stocks'
Read also; Atul Auto Ltd Potential100 Bagger Stock 

How to invest in Penny Stocks for multibagger return?

Investing in “Penny stocks” is usually not suggested by stock market experts because it is one of the riskier behaviors that traders and investors may engage in within the larger stock market. The term “Penny stocks” may be defined as stocks with a share price under a certain amount, usually under Rs.20 per share. However some beginners prefer investing and trading in “Penny stocks” without thinking reason as to such low share prices which often come with more volatility and risk. This article may be helpful to “Penny stock Lovers” who do not have much idea about trading and investment. If you really wish to get involved in this kind of risky “Penny stocks” trading, please go through these common steps recommended by experts who advise on whether “Penny Stocks” worth buying? Investing in "Penny stocks" is generally not suggested by "Value Investor" because it is one of the riskier behaviors that traders and investors can engage in the broader stock market. The term "Penny stocks" can be defined as shares with a share price under a certain amount, usually under Rs.20 per share. However, some beginners prefer to invest and trade in "Penny stocks" without thinking about this low price of shares that often come with more volatility and risk. This article may be useful for "Penny Stock Lovers" who do not have much idea about trade and investment. If you really want to get involved in this kind of risk "Penny stocks" trading, please go through these common steps recommended by experts who advised on current topic 'How to invest in Penny Stocks" Are they Worth Buying?

11 Things to Consider Before Investing in Penny Stocks

1.   Look at EPS and P/E ratio: choosing stocks for your portfolio is not an easy task, penny stocks may look cheaper at the first blush yet they are overvalued most of the time. So the question arises How to identify whether a penny stock worth buying? The answer is simple; just look at its fundamentals to know its earning capacities, here you may look at its EPS (Earning Per Share), it can either be calculated or may be had from various websites such as NSE, BSE, Moneycontrol etc. Once you calculated EPS, you should now calculate its current P/E multiple means at what times of its earning the scrip in trading? Then compare industry P/E of the penny stock you are thinking to buy. If it is trading at much lower P/E than that of its industry then you may think to go with it, otherwise it make no sense to invest in a penny stock having P/E more than its industry P/E. Key funda is here that you are not investing in stock but in its business and a business without profit is in fact no business. The single parameter for investment in stock market is its earning.

2.   Debt Equity Ratio: the rule of thumb is a company having higher Debt Equity Ratio should be avoided because a debt laden company can hardly deliver profit, most of the income of such companies are absorbed in paying interest on loan taken by the it. Ideal Debt Equity ratio should not exceed 2:1, however it depends upon nature of the business of the company.

3.  Find out Reasons for Low Price: This the important part of your exercise as to decide whether a penny stock worth buying?, there may be a number of reason for its low price; if it is due to its incessant poor result over a couple of years, inefficient management, company’s inability to survive, it having huge debts etc.  you must avoid it on the other hand if it is due to new listing, due to changes in cyclical phases or due to news based downfall you might think to go with it.

4.   See Volume: Let’s say you are lucky to get a “Penny Stock” at as low as 50 paise per share and it does go to Rs.7.50. Congratulations! You are sitting on 1400% but can you really book your profit? Beware - when you go to sell your loving “Penny Stock”, you might not find any (or sufficient number of) buyer. “Penny Stocks” are normally illiquid. A large part of the share-holding is owned by the promoters who may readily be willing to be sellers. But when it comes to buyers, you won’t find many of them. Sudden spurts in its volume sometimes could be signs of manipulation and not high liquidity. So Next time when you go for a “Penny Stock” first see its volume.

5.  Market Cap:  you should avoid investing and trading with very tiny companies because shares of such companies may easily be manipulated, to find out the size of a company you must check its market cap. Market Cap of a company is calculated by multiplying its total number of issued capital by market value of one share.

6.   Trend Analysis: I know that technical analysis is not an easy task for a new trader so I suggest you to see its trend as shares tend to go with its trend. Remember for a trader “Trend is friend” and special for a “Penny Stock” Lovers.

7. Speculating Business Prospects: Remember you are speculating on the future direction of the price in a “Penny Stock” you are trading, so here it becomes inevitable to analyze the business prospects of the company you are trading and investing with. As the stock market speculation climbs at the peak and sell off happens, the same scrip starts losing its value quite quickly, the fact is that the speculators in share market are only worried with the price rise of shares in recent future. At the same time a value investor in the share market understanding the fundamentals of the stock knows what the business prospects of the company is; and how the stock is likely to perform in near future. Hence speculation in stock market refers to forecasting of share price.
8.    Profitability: A company without profit is not meant for investment for obvious fact if it is not able to earn how it can help you to make earn, so one should also examine current earning and its future prospects. No growth can be expected in near future without profit.

9.  Cash Ratio:  Cash ratio is also known as cash coverage ratio; it is a liquidity ratio which measures a company's ability to pay off its current liabilities with the help of cash and cash equivalents. The cash ratio is much more restraining than the current ratio or quick ratio. In fact no other current assets can be utilized to pay off current debt.  So when you think to buy a “Penny stock” please look at the cash ratio. You need to see if the company maintains sufficient cash or its equivalent to pay off its debts when they come due.

10. Face Value and Book Value: Though this is not much important for a stock having good growth possibility yet it is suggested you to check it once specially in case of a “Penny stock”. Face Value and Book Value provide useful insight to traders and investors to know the real position of the stocks. For Trading with “Penny stocks a stock having higher face value and Book value is suggested.

11.  Find a Turnaround Company: Sometimes, a company goes through a terrible bankruptcy and end up restructuring at a great value. Possibly it can get out from under huge amounts of debt due to acquisition or reconstruction as it has a lot of inventory or capital equipment or other valuable assets that are worth something to an acquirer, however this is not easy to find a turnaround company for a new trader.

Caution with Penny Stocks

One of the myth with traders trading with “Penny stocksis   'It can't go any lower' but reality is that risk reward ratio hardly favors “Penny stocks”.

In my next post I will explain “Caution with penny stocks” and will also analysis of few penny stocks traded in NSE & BSE such as “Syncom Formulations”, “FSL (FirstSource Solution)", Trident Ltd etc with above parameter which will help you to understand whether these “Penny Stocks” worth buying?

read also : Latest Small Cap Multibagger Stock List 

Your comments and valuable suggestions on present post "How to invest in Penny Stocks" will highly be appreciated.

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