7 RULES FOR INVESTING IN PENNY STOCKS

By admin | 3 Aug, 2015 9:04am

Despite the risks, small investors are putting big money in low-priced penny stocks. They are lured by the fantastic returns that some stocks have delivered in the past few months. If you also want to invest in this risky segment of the market, keep a few rules in mind

DON’T INVEST LARGE AMOUNTS

Don’t lean too much on these risky investments.Penny stocks should not account for more than 10% of your total equity portfolio. This means if your total investment portfolio is Rs.20 lakh and 30% (or Rs.6 lakh) is in stocks, then the maximum you should put in these high-risk stocks is Rs.60,000. Invest only what you can afford to lose.

INVEST ONLY IN 2-3 STOCKS

The principle of diversification does not work here. Instead of picking up a large number of penny stocks, invest in only a handful of scrips. Spreading your money across a basket of low-priced stocks will not let you earn meaningful returns from them. If you have Rs.3,000 invested in a stock and it gives a return of 25% in a month, the gain will be an insignificant Rs.750. Besides, it is easier to monitor 2-3 stocks rather than a portfolio of 10-15 lowpriced stocks.

DON’T INVEST AND FORGET

Investing in penny stocks should be seen as a short-term gambit, not a long-term strategy. If the stock witnesses a sharp rise, it may be time to exit or at least book partial profits. Some investors might think that if they wait for a year, the gains will be tax free. But the stock may have fallen by then. Set a target and exit when it is achieved. Don’t hold penny stocks forever.

DON’T BELIEVE ANYONE

The online forums of financial portals are awash with advice and information on penny stocks. Don’t believe a word of what other investors have to offer.In this segment, everybody is in search of the greater fool who will pay a higher price for the junk in their portfolio. Also, take the claims of the management with a pinch of salt. They usually paint a rosy picture.

BUY STOCKS WITH HIGH VOLUMES

Some penny stocks are very thinly traded. For instance, the average daily volume of Titan Securities for the past 1 month has been only 3 shares. So if you have 5,000 shares of the company, it will be quite difficult to offload them when you want to exit the stock. Buy stocks that have reasonably high trading volumes so that there is ample liquidity. Don’t look only at one day’s trading but consider the monthly average.

DON’T TRY TO AVERAGE YOUR PURCHASES

If you bought a share at Rs.6 and it is now trading at Rs.3, don’t try to average out your purchase by buying more of it. You may end up digging a bigger hole for yourself and lose more money. Don’t get anchored to a price and be ready to book losses if an investment goes wrong. You should improve the average by selling some shares when the price starts moving up, rather than buying more when it goes down.

NEVER LET SUCCESS CHANGE YOUR STRATEGY

They say the four most dangerous words in the market are “It’s different this time“. Investors who make early gains tend to get carried away by overconfidence and start making mistakes. Do not forget the six rules of investing given above if you don’t want to lose your shirt in this market.

Source: Economic Times.

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