What are penny stocks and the risks of investing in them

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Updated: December 26, 2017 9:39:37 AM

These shares are thinly traded on the exchanges they can easily become target of manipulators.

thyrocare technologies,  thyrocare technologies rating, market rating of thyrocare technologiesThe term originated in the US and was used for stocks with price below . (Image: Reuters)

Stocks of small public companies which trade at low prices are called penny stocks. Such stocks are highly speculative in nature and carry large bid spreads, limited following & disclosure and relatively small capitalisation in the market. Such stocks present a high risk for investors, who are often lured by the hope of large and quick profits. The penny stock market is that it has little liquidity, so holders of shares in penny stock companies often find it difficult for them to cash out of positions. The term is a misnomer in itself as there are various definitions available for the stock. The term originated in the US and was used for stocks with price below $5. A penny stock generally trades at a very low price that is usually below Rs 10 on the exchanges.Exchanges usually put these stocks in the category of trade-to-trade (T2T) but some also include them in the B group on BSE.

Concerns for Investors

For the reason, these shares are thinly traded on the exchanges they can easily become a target of manipulators. A small amount of investment is more than enough in triggering a spike with them.For instance, you can easily increase the price of a penny stock that is standing at a rate of Rs 2 presently to Rs 4 with a minimum of efforts. This is almost a 100% rise and can attract a large number of investors especially when the markets are facing bearish sentiment. This is usually achieved by spreading positive news about the stock in the market making the stock rise. Once the price rises to certain levels, small investors make a beeline to invest in the share. This is when manipulators sell the stock triggering a major crash which leaves small investors in a lurch.

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