Penny stocks have always been alluring for investors but a smart investor steers clear of them. Most consider investing in penny stocks a good option since they are more affordable to invest in.
In Indian financial markets, the term penny stock commonly refers to any stock trading outside one of the major exchanges like Sensex or Nifty. The SEBI defines penny stock as low-priced, speculative security of a very small company regardless of market capitalization.
They are sold by companies who are seeking money for expansion, basic operations or even commencement of business. Many penny stocks lose all of their value in the short and long term. Therefore, financial analysts warn about the risks which include limited liquidity, lack of financial reporting, and fraud. Lack of liquidity and volatility also makes penny stocks much more vulnerable to manipulation by management, market makers, or third parties. Obtaining quotations of certain penny stocks makes selling them off even more difficult. While jumping on to one of the riskiest investment vehicles the investors ought to be prepared to lose their entire investment.
By definition - "Penny stocks are volatile, risky, thinly traded securities issued by minuscule companies that are disproportionately known for having big losses, meager sales, cozy insider management and scant or unverifiable financial data. Unscrupulous promoters typically work by blast faxing or flooding the Dalal Street with press releases so that investors will read the dubious news and bid up the hyped shares. Then the promoters can cash in by selling the stock, typically in huge volume. There is a certain formula to these advertisements: breathless claims for a miraculous-sounding product or trove of commodities, comparisons to well-respected brands, and an exhortation to the reader to get in on the ground floor by investing in the unknown company."
Buying a lottery ticket would promise you the same degree of unpredictability as investing in penny stocks that you are unaware of.
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