about 2 years ago
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Did you take a look at the list of stocks hitting new 52-week highs over the last couple of days?

Or for the matter, today’s list – Abhishek Finlease, Dhanada Corp,  Alchemist, Lords Ishwar Hotel, Mega Corp, Prakash Steelage -majority of them with a maket cap of less than even Rs.5 crore.

Then there are other stocks, penny nevertheless though well known – Birla Tyres, Educomp, Hathway Bhawani, Modern Dairies, Tuticorin Alkali, York Exports.

Or this strange company – Indian Infotech, with market cap of Rs.19 crore and promoters stake at 19.28% and today hitting a new high at 20 paise!

Or for that matter, Praveg Communication, which posted a net profit of Rs.18 lakh in Q3FY20 and market cap of Rs.9 crore, quoted at a new high at Rs.17.51.

Another strange company is Welcon International, which has no promoter as such, had no revenue in Q3 and net profit of Rs.7 lakh, market cap of Rs.18 crore and hitting a new high today at Rs.8.71.

There are scores of such companies and somehow, despite there being so many much better opportunities, people continue to remain in pursuit of these penny stocks, dreaming of striking it really rich.

We have many investors/traders posting us queries on the website, asking for some penny stock ideas. The only question which comes to mind is “why?” This search for the elusive pot of gold at the end of the brilliant rainbow is what puts traders at risk. And this is a dangerous time to be on the hunt for penny stocks and it is actually the perfect time to stand back and look at where and what we are investing in. Wait for the dust to settle before you take a call on large cap stocks too!

The one omnipresent character of all traders buying and selling shares on the bourses is greed. Even if a trader, in a particular stock is in handsome profits, he continues to hold, hoping to make more. And then there are the other traders, the high risk traders, who want to invest only in small cap or penny stocks and hope that one day it becomes a mid cap stock. But does that happen? Maybe we come across a few random cases; there are stories of more losses than gains, yet traders keep a selective memory and buy into penny stocks, only to get trapped.

Penny stocks are characterized by scams, with management and manipulative brokers having one point agenda – to snarl susceptible traders. These stocks typically have volatile price variations. The most telling pointer is when a stock has a pitiable volume of trade but yet manages to hit a new high with even every 100 shares traded. Market cap is usually very small. Risk is very high, with dubious credentials of the management. Buying into such stocks is easy but try selling it when the price rises and you will know the true meaning of being trapped in a penny stock. Lack of liquidity and high volatility should be the big blaring warning signs. Delisting is a frequent phenomenon. Brokers go overboard recommending these stocks and SMSes are often used to sell these stocks. Despite all these facts, people constantly ask for advice on which penny stocks to buy.

The list of such dubious stocks is endless and the queue of traders wanting to pick the next ‘Infosys in the making’ or the next ‘Sterlite in the making’ is growing. And that is worrisome. Mid cap stocks are still a better risk than small caps. And remember – rarely do penny stocks ever become even mid caps, forget becoming large caps.

PS: In the current scenario, cherry picking in mid cap stocks is also not a good idea. As we said earlier, wait for the dust to settle and let us see where we are headed.

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