Are you hunting high and low for the best penny stocks to buy right now in India listed on the BSE and NSE to become a millionaire within a decade?
Since there are thousands of stocks that are listed on the major stock exchanges namely BSE and NSE, it is a herculean task to pick the best penny stocks to buy for long-term growth in India. Ace Investors namely Rakesh Jhunjhunwala, Vijay Kedia, Porinju Veliyath, and Dolly Khanna make money by investing in the best penny stocks in BSE & NSE by applying their own investment strategy that is developed by their blood, sweat, and tears. But the good news is you can pick the best penny stocks to buy for long-term growth by developing strategies, since you have got internet at your fingertips that can help you to pick the best penny stocks.
What is Penny Stock?
Penny stocks are referred to those stocks that are trading at a very low price of 10 or less and have a very low market capitalization. Penny stocks are the riskiest stocks since they have low market capitalization, lack of liquidity, price manipulation, and above all you won’t find proper information about the company i.e. shareholders, partners, debts, assets, etc.
The pros of investing in penny stocks
Do you know the market price of Titan company back in 2000? Will you believe if I tell you the price Titan company was trading at 2 in January 2000? If you don’t believe this, please check the historical prices of Titan company back in 2000. When you are investing in penny stocks and find a penny stock like Titan Company or UPL.
You will witness a massive profit and become a millionaire within a decade. Apart from that here are the 3 pros of investing in penny stocks,
Superior Returns – A Growth Stock can give you a steady return in the long term. Probably a Growth stock can double your investment within 5 years. But if you pick a bunch of good penny stocks in India the penny stock can double your investment within a month or a quarter. Penny stocks are able to deliver superior returns in the short term in comparison to growth stocks.
Have the potential to make you a millionaire – The penny stocks are not on the radar of the big brokerage houses and Mr. Market will find quality penny stocks that are available at cheap prices. If you have spotted a penny stock and stay invested, when a stock falls under the radar of the market you will become a millionaire within a decade by investing only a few thousand rupees.
Don’t require a huge amount – The best part is that you can start investing in penny stocks if you have 100 in your trading account. If you want to buy bluechip stocks then you must have 10000+ [Nestle India, Maruti Suzuki India, etc.] in your trading account, but you can start investing in penny stocks as low as 100.
7 Cons of investing in Penny Stock
To raise capital for a business, startup companies offer Initial Public Offering since this is the cheap and affordable option for startup companies. When you investing in penny stocks here are the inherent risk associated,
Penny Stocks can be delisted from major Stock Exchanges
Since the major stock exchanges namely BSE & NSE, have some stringent laws and regulations, penny stocks can be delisted from these major stock exchanges for non-compliance with rules and regulations.
Loss of Invested Capital
Since Penny stocks are startup companies, these startups can close their door owing to lack of profitability for the long term, or doesn’t tackle peer competition, etc. When these startup companies become bankrupt all the assets are sold out to repay the creditors and the share of the company becomes worthless. In this way, you may lose all of your invested capital.
There are various instances come in daylight where the promoters and insiders of the startup companies apply the ‘Pump and Dump’ strategy to manipulate the price heavily. At first, the promoters and insiders of the startup company buy the penny stocks in bulk. When the prices of the penny stocks are trading at higher levels owing to the increase in demand, the promoters sell their stake to the retail investors to book profit. In this way, at the end of the day, a retail investor loses significantly.
Since Penny stocks are highly volatile in nature a penny stock can jump 20% in a trading session on the flip side can lose 50% within a month. When you invest in penny stocks you will face an inherent risk of loss of invested capital since penny stocks are prone to become bankrupt that will lead the company to exit from the business.
Lack of Liquidity
Penny stocks not only trade infrequently in the stock exchanges but also lack liquidity. Suppose you have 10000 shares of Titan Securities but the trading volume of Titan Securities is only 3. Even if Titan Securities witness a bull run of 1000% within a year to whom you will go to sell your shares to book profit? Most likely you will not book your profit since there is not sufficient number of buyers.
Penny Stocks are not trustworthy
Penny stocks are not trustworthy since they are not only a startup company with low market capitalization but also the promoters of the company can apply the ‘Pump and Dump’ strategy to make a profit by creating shell companies. Additionally, the penny stocks can be delisted from stock exchanges if they don’t comply with the stringent rules and regulations.
You won’t be able to find detailed information
Since penny stocks are the securities of startup companies trade on the BSE or NSE, you won’t find crucial information like Sales Growth, Profit Growth, Management, Peer Competition, Future plans, etc. before investing. Since you have not found crucial information it is a better idea to play poker in the casinos of Goa instead of buying penny stocks.
As investing in penny stock can lead to the inherent risk of invested capital, it is a tuff call to pick the best penny stocks on NSE. Here is the 7 point checklist you should check before investing in penny stocks.
Parameter #1. Find Undervalued Sectors
What makes RakeshJhunjhunwala a value investor is that he successfully identifies the sectors that have a huge untapped potential in the long run. Take the example of Titan Company. He bought the share when Titan Company was trading at Rs. 2 and stayed invested for decades to gain superior returns in the long run. You should find undervalued sectors that aren’t on the radar of the market and stay invested for the long run for fruitful returns.
Parameter #2. Perform detailed research before own any penny stocks
Are you investing in penny stocks solely since you have got penny stock at a price of Rs. 10? Many a retail investor thinks that the price has already corrected heavily and now the stock will start a bull run and make their investment double or triple within a year.
For God’s sake don’t apply this approach.
Penny stocks are highly volatile in nature. The prices of the penny stocks witness either a 100% upside or 500% downside for any minor changes in government policies, war, election, and the advent of new technology, etc.
So, don’t invest in penny stocks solely on the insider’s update or Jackpot call or it has witnessed a sharp correction and you assume there is no downside left. Do keep in mind that investing in penny stocks can make you a millionaire or bankrupt. Before investing in penny stocks do check the following parameters,
- Debt to Equity Ratio,
- Market Capitalization,
- Sales Growth,
- Profit Growth,
- Price to Earnings Ratio,
- Book value per share,
- Return On Equity,
- Earnings per share,
- PEG Ratio,
- Dividend Yield.
Additionally, do check the Qualitative Factors namely, Management of the company, Future plans, Competitive Advantage, etc. before investing in penny stocks.
Parameter #3. Check the Price Volatility
Do remember pick a penny stock that is volatile in nature. Just head over to Economic times or Moneycontrol to watch out for the gainers and losers. If a penny stock’s price fluctuates, it is a clear signal that there are a lot of buyers and sellers. Contrary to that, if you find there are no price fluctuations at all, you can assume there are only a few buyers and sellers.
Parameter #4. Check the Trading volume
Suppose you have bought 1000 shares of a company and within a year it has surged 200% from the buying price. To whom you will sell if the trading volume of the stock has is only 10 a day. That’s why perform an audit of the trade volume of the penny stocks before making an investment. No matter how the fundamentals are intact, don’t buy a penny stock that has a trading volume of fewer than 1,00,000. When you buy penny stock with a trading volume of 1,00,000, you won’t find any difficulty to book profit since there is an ample number of buyers.
Parameter #5. Check the Liquidity Ratios
The Liquidity Ratio can be defined as the ability of the company to pay off the current debt liabilities without borrowing any external capital. You should invest in those quality companies that have a Liquidity Ratio greater than 1. The higher the liquidity ratio the higher the chances of repaying the current liabilities the company possesses without infusing external capital.
Parameter #6. Check the Solvency Ratios
The solvency ratio gives a clear signal of whether a company will pay off the long term liabilities by its current cash flow. As a rule of thumb pick a penny stock with a Solvency Ratio > 20%. The lower the Solvency Ratio is the higher the chances of default will be on its debt obligations in the long run.
Parameter #7. Identify the Pattern
Even though history repeats itself, it does not in the price chart of the penny stocks. But by analyzing the trends of the price fluctuations you will be able to make more informed decisions. When you analyze the various charts carefully, you will find some patterns in the price chart. Honestly say, this will require hard work and patience, but by analyzing the chart patterns you will definitely make money by investing in penny stocks.
Top 7 best penny stocks to buy right now in India
After analyzing the above-mentioned factors here are the 7 best penny shares to buy in India. Do remember don’t invest more than 10% of your portfolio in penny stocks.
Housing Development and Infrastructure Ltd.
This is one of the best Indian penny stocks to buy since the company has a marginal debt to equity ratio and strong price movement. HDIL was incorporated in the year 1996 and has a market capitalization of 315 crores. HDIL operates in the Real Estate sector. HDIL’s key Products/Revenue Segments include the construction and sale of residential flats, Commercial flats, shops, and plots across the country.
Now let’s dive into the fundamental ratios of HDIL,
Market Capitalization – 315 Cr.
Trading Volume – 1,74,141
52 Week high/low – 6.50 / 1.25.
3i Infotech was incorporated in 1993 and has a market capitalization of 638 crores. 3i Infotech operates in Information Technology sector. 3i Infotech’s key Products/Revenue Segments include Information Technology enabled services, and Information Technology Products. If you are looking for the best penny stocks for long-term growth then you should buy this stock, since this company delivers not only a steady Growth in Quarterly Net Profit but also Growth in Operating Profit year on year.
Now let’s dive into the fundamental ratios of 3i Infotech,
Market Capitalization – 638 Cr.
Trading Volume – 30,74,924
52 Week high/low – 4.10 / 1.15.
RattanIndia Power Ltd.
RattanIndia Power Ltd. was incorporated in 2007 and has a market capitalization of 1136 crores. RattanIndia Power Ltd. operates in the Power sector. RattanIndia Power’s key Product/Revenue is to deliver power supply. The best part?RattanIndia Power Ltd. delivers not only a steady Strong EPS Growth year on year but also Growth in Operating Profit year on year.
Now let’s dive into the fundamental ratios of RattanIndia Power Ltd.,
Market Capitalization – 1136 Cr.
Trading Volume – 6,34,74,220
52 Week high/low – 4.45 / 1.05.
IFCI Ltd. was incorporated in 1993 and has a market capitalization of 1649 crore. IFCI Ltd. operates in the Term Lending Institutions sector. IFCI Ltd.’s key Product/Revenue is Income from Interest, Rental Income, and Dividend. The best part? IFCI Ltd. delivers not only a steady profit margin quarter on quarter but also Growth in Profit margin year on year.
Now let’s dive into the fundamental ratios of IFCI Ltd.,
Market Capitalization – 1649 Cr.
Trading Volume – 4,03,04,778
52 Week high/low – 8.70 / 3.10.
Bajaj Hindusthan Sugar Ltd.
Bajaj Hindusthan was incorporated in 1931 and has a market capitalization of 663 crores. Bajaj Hindusthanworks in the Sugar sector. Bajaj Hindusthan’s key Product/Revenue is from the sale of Sugar, Alcohol, and by-products. Bajaj Hindusthan has steadily improved RoCE that indicates the company is effectively using its capital to generate profit. Apart from that ROE has been improving during the past 2 years.
Now let’s dive into the fundamental ratios of Bajaj Hindusthan,
Market Capitalization – 663 Cr.
Trading Volume – 67,88,016
52 Week high/low – 8.30 / 2.35.
Hindustan Construction Company Ltd.
Hindustan Construction Company was incorporated in 1926 and has a market capitalization of 1074 crores. Hindustan Construction Company operates in the Construction sector. Hindustan Construction Company’s key Product/Revenue is from the contract. Hindustan Construction Company has steadily improved Annual Net Profit and FII / FPI and domestic Institutions increasing their stake.
Now let’s dive into the fundamental ratios of Hindustan Construction Company,
Market Capitalization – 1074 Cr.
Trading Volume – 1,35,75,317
52 Week high/low – 12.20 / 3.60.
Trident Ltd. was incorporated in 1990 and has a market capitalization of 5070 crores. Trident Ltd. operates in the Textiles sector. Trident Ltd.’s key Product/Revenue is Income from Textiles, Paper, and Waste Sales. Trident has raised Net Cash Flow and has been improving cash flow during the past 2 years.
Now let’s dive into the fundamental ratios of Trident Ltd.,
Market Capitalization – 5070 Cr.
Trading Volume – 4,89,18,156
52 Week high/low – 10.15 / 3.05.
7 Golden Rules to follow when you are investing in Penny Stocks
Despite the inherent risk of loss of invested capital and going bankrupt, many retail investors are eager to invest money since penny stocks are available for 10 or less. Many a retail investor is impressed by stories of Bajaj Finance, UPL, Titan Company, Lupin, etc. Do remember the following points when you want to check your luck by investing in penny stocks.
Rule #1. Don’t invest all of your money in penny stocks only
As a rule of thumb, you should invest in penny stocks not more than 10% of your stock portfolio. Suppose you want to invest 1,00,000 then don’t invest more than 10,000 in penny stocks. Do remember, many retail investors lose their investment by investing in penny stocks.
Rule #2. Don’t Over diversify
The diversification rule doesn’t apply when you invest in penny stocks. Since you are picking low priced penny stocks that are prone to manipulation, don’t diversify your portfolio more than 3 stocks. When you diversify your penny stock portfolio not more than 3 stocks, it is easier to track than have a portfolio of 10 penny stocks.
Rule #3. Do check the price movement once a week
Since penny stocks can surge or correct 50% within a week, stay your cautious eye on price movement. If the stock witnesses a sharp rise it is a good idea to book profit. Many a retail investor thinks that the price will tend to elevate to higher levels, but the stock may fall the next week. Don’t marry with penny stocks. Instead set a target and book profit when the target is achieved.
Rule #4. Don’t rely on the reports solely
Have you got any ‘Jackpot Call’ or ‘Multibagger Stock Advice’ on your smartphone or email? If yes, don’t rely on such reports. May be these emails or messages are sent by promoters or insiders of any shell company. Don’t invest in penny stocks solely on the basis of these reports or messages. Instead, run your independent research to check whether the penny stock is deemed fit of key parameters before investing.
Rule #5. Watch out the trading volume
Suppose you have 2000 shares of a penny stock and it has witnessed a 200% return within a quarter. To whom you will sell your shares when the stock has a trading volume of 10 a day. As a rule of thumb, you should buy only 1% shares of any company of the total trading volume a day [Trading volume not fewer than 1, 00,000].
Rule #6. Don’t make an Equity SIP
Don’t start an equity SIP to average the buying price. Since penny stocks are highly volatile in nature and you don’t know if the price will surge or drag. It is not a good idea to average out by buying more shares. Instead, it is a good idea to offload the shares when the price moves upwards.
Rule #7. Don’t hold a penny stock for a long term perspective
Are you hunting high and low for penny stocks that will be the next Asian Paints?
Then you probably lose all of your investment capital. Since penny stocks are full of shell companies, 99% companies will be wiped out from the stock market. That’s why they are listed on BSE and NSE priced below 10. If you are dreaming about by investing in one penny stock, you will able to make a million dollars and will enjoy a worry-free happy retirement life then you will definitely lose all of your invested capital.
It’s a futile work to hold a penny stock for a decade hoping it will surge from 10 to 1000. It is a losing strategy to hold a penny stock for a decade hoping it will go from 10 to 1000.
- Read also: 15 Best Indian Stocks to Buy for Long Term Investment
- Read also: How To Pick Best Stocks In India
Have I missed the best penny stocks to buy in India? Feel free to suggest if I have missed any so that I can add the best penny stocks in NSE. If you have found this article helpful do share this article with your loved ones.