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Avoid Penny Stocks



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Question: Sir fundamental ache ho compny k balance sheet sahi ho yoy , qoq decent profit ara ho. Tho penny stock m nahi jana chaiye ?

Answer: Penny stocks prices are "managed" more by operator play than their fundamentals and quality.

Hence, better to refrain from it.

As the CMP of the stock goes above Rs. 20, they become more and more difficult for operators to manage.

Rule #3: Also avoid companies whose CMP is below Rs 20 (penny stocks).

Such stocks are called *penny stocks* and are extremely risky.

Why?

Because they are cheap and there are bad guys in the market called "operators"

.. These operators play with the stock

by buying too much qty

or selling too much qty

and by giving you the wrong signals.

There are several ways in which these operators work.

One other way is that a handful of operators do something like a circular trading

Operator A sells to Operator B artificially increasing the stock price.

Operator B sells to Operator C again increasing the stock price.

Operator C sells to Operator A ..

This cycle goes on and on and retail investors like you and me get attention and start investing in them.

Slowly, in the process, the operators silently sell and exit their positions

And retail investors will get trapped at higher price.

Since operator is no longer in market, volumes for the company share will not be there.

So we even cannot sell at lower circuit.

In other words, they are stocks that are easy to manipulate and

.. chances are that most people get stuck with such shares

than to make profit out of them.

Of course, not all penny stocks are bad ones.

There are several success stories ...

some penny stocks growing to Rs. 100 and above!

But the failure rates are generally more.

Why risk investing in penny stocks when other better quality stocks are available in the market.

As if we dont have sufficient shares / listed companies??

Right?

Not convienced? Lets read more..

The price of the stock is, in one of the many ways, a reflection of the performance of the company.

Share prices of successful companies will be generally be higher ..

while, majority of unsuccessful companies share prices will be smaller and smaller.

When a penny stock company performs well, the share price goes up.

However, investing in penny stocks pose a risk.

The price per share is low and in some cases the volume traded will also be low and this allows price manipulation.

Because the quality of company is low, there will be little or no controls and allows oversight.

Operators take advantage of such companies and decorate the company to be a great performer going forward.

They release buy recommendations and attractive novice investors to buy the stock luring them as multibaggers and potential returns.

To a certain extent, the share price too goes up because people do keep buying.

Another risk factor associated with them is that:

Penny stock companies are often headed for bankruptcy or are highly overleveraged

A stock is a penny stock if its price below 20. But if it goes above 20 And later came to below still we called them penny stock?

Eg. Prakash controwell is Its high was 21 Now trade 4 to 5

Yes. still a penny unless it stays above Rs 20 levels consistently

The idea behind the classification is not just the price alone. We need to see the presence of operator in the stock and how easily he is taming the stock.

Does capital as per books also infuence on penny stock?

Yes. The current market price of the stock will be determined by several factors including capital, outstanding shares issued, face value etc.

Additional Reading:

http://www.investopedia.com/updates/penny-stocks-risks-rewards/

So, with this Rule, we have made our first three quality factors:

1. Do not invest blindly based on tips given by others

2. Invest in stocks that are listed both on NSE and BSE

3. Do not invest in penny stocks

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