What are low priced stocks? Are penny stocks always low priced?
In stock investing it is important to define ‘low price’.
General understanding is; Rs.100 is greater than Rs.50, right?
But it can be different in case of stock investing.
A stock which is trading at Rs.100 can be cheaper than a stock trading at Rs 50.
How this is possible? It is a violation of the theory of mathematics, right?
But this is what makes stocks investing so interesting.
The puzzle of “low price” becomes more interesting while dealing with penny stocks.
Penny stocks are already low priced, but the bigger question is, are they also “undervalued”.
An undervalued, low priced penny stocks automatically becomes favourite of investors.
So lets try to understand about penny from the basics.
#1. What are penny stocks?
These are stocks having very low market price. Their Market Capitalisation is also very low.
Generally speaking, stocks whose market price is below Rs.15 are referred as penny stocks.
There are no set rules, hence I decided to set this (Rs.15 level) screening criteria for myself.
Penny stocks are such, which do not attracted lot of attention during majority of trading days.
Hence their volumes can be very low.
Stocks which are traded in low volumes, are prone to price fluctuations.
These price fluctuations can be make or brake the investment. Why?
Because rapid price fluctuations in penny stocks may be “influenced”.
Promoters, brokers, large Investors etc can influence the market price of penny stocks.
#2. Why people like penny stocks?
Because of its low market price. Penny stocks are very light on pocket.
Low price per share makes it possible for people to buy more shares per Rupee spent.
Stock Name: MRF Limited.
This is one of the top companies listed in BSE/NSE in terms of Market Capitalisation.
This company makes tyres, tubes, paints, conveyor belts, toys etc in India.
The market price of MRF Limited is Rs.76,899 per share (as on 30-May’18).
How many people will be interested to buy shares of MRF?
At least a common man would stay away from it because of its exorbitant market price.
Even if is trading below its intrinsic value, a common may not buy it.
High market price of shares makes it tough for common men to buy it.
But penny stocks are such shares which are tailor made for us. Why?
Because of the following reasons:
- Very low per share price.
- More number share can be purchased for per rupee invested.
- Bigger capital appreciation is possible in penny stocks.
- Today’s value in penny, can be worth in thousands tomorrow.
But it is also essential to take extra care in buying penny stocks.
Drawbacks of Penny stocks:
- It is not easy to sell penny stocks. Their buyers are less.
- Penny stocks often represent companies which has a “weak” business fundamentals.
- These stocks are more prone to scam attacks (pump and dump).
- People are more likely to lose money in penny stocks than in other stocks.
#3. Penny stock are very volatile (risky!)
What it means by penny stocks being volatile? Volatility is an indicator of “risk of loss”.
To measure stocks volatility, there is financial term called Beta.
The higher is the beta, more volatile is the stock price.
Market price of high-volatile stocks fluctuate very rapidly.
Market price of low-volatile stocks are comparatively steadier.
High-volatile stocks has high beta. Low volatile stocks has low beta.
Suppose a stock has beta of 1.3.
If Sensex moves down by 10%, this stock’s price will go down by 13% (10 x 1.3)
Similarly if Sensex goes up by 5%, this stock’s price will go up by 6.5% (5 x 1.3).
Generally speaking, Beta of penny stocks remain very high (above 1). Though it is not true for all penny stocks.
Hence before including any penny stock in ones watch-portfolio, better will be observe its Beta more closely.
#4. Penny stocks & Business Fundamentals.
Penny stocks are most unpredictable. Hence taking a calculated risk with penny stocks is better.
This is specially true for long term investors. Stock traders treat penny stocks differently.
So what investors can do while dealing with penny stocks?
I prefer those penny stocks having comparatively good business fundamentals.
Though it is not a fool-proof strategy, but it may work this way.
It is also true that, penny stocks with good fundamentals are a rare finding.
Hence one of the easier method to deal with penny stocks is to pick one with higher market capitalisation.
There is a difference between how following people look at at penny stocks:
- An investor.
- A trader.
An investor must handle penny stocks differently.
One step in doing so is to, go for deeper fundamental analysis of penny stocks.
If one is not in a position to do fundamental analysis, it is better to avoid these stocks.
How an investor see Penny Stocks?
If fundamentals are bad, do not touch it.
No matter how low is the price, investors will avoid such a stock.
Never looks at market price of stocks in isolation. Trading prices are very misleading.
In fact it says nothing about its underlying business being good or bad.
It is necessary to perform fundamental analysis before committing to a penny stock.
Only after fundamental analysis, that one can really know if the stock is priced well or not.
Follow this basic fundamental rule of stock investing:
Buy penny stocks available at discount to its intrinsic value.
But it is not easy to estimate intrinsic value of stocks, right?
What to do?
Use financial ratios to evaluate if a stock is trading at cheaper price or not.
All stocks must pass through the screening of financial ratios (or fundamental analysis) before its purchase.
Conclusion – What are Low Price Penny Stocks?
I consider those penny stocks which trade at a market price of Rs.15 and below.
But these penny stocks must also have a reasonable business fundamentals.
How to do it?
One can do the following:
- Use tool like stocks analysis worksheet.
- Use financial ratios to do price valuation.
Famous stocks like TCS, RIL, HDFC, ITC etc are hardly available at undervalued price levels.
But it is easier to find penny stocks which are undervalued.
Lets make our own list of penny stocks and start tracking their price movements.
Looking only at price is not useful.
Comparing market price of stocks with following parameters will be more meaningful:
- Earnings (Profit) & its growth,
- Net worth,
- Operating cash-flow etc.
Low Priced Penny Stocks to buy in India in 2018
(Updated as on May’2018)
- Oswal Agro Mills Ltd.
- Parle Software Ltd.
- Gothi Plascon (India) Ltd.
- Quest Softech (India) Ltd.
- Chartered Logistics Ltd.
- Compucom Software Ltd.
- Patidar Buildcon Ltd.
- Ceeta Industries Ltd.
- Nagarjuna Agri Tech Ltd.
- Southern Latex Ltd.
Check this link to get more details related to the fundamentals and price valuation of above list of stocks in tabulated form…