Why you should not chase penny stocks?
It is tempting to buy 1000 shares of a stock that is quoting at Rs 3 than to buy one share which is quoting at Rs 3000. For some the thrill of buying hundreds of shares (large quantity) pushes them to buy a penny stock - a stock quoting at an absolute low price. For some Rs 3 is very cheap and accessible whereas Rs 3000 is too costly to buy. Whatever be the reasons, many individuals are seen chasing the next Infosys and next Larsen & Toubro. However, chasing penny stocks just because they are quoting in single digits may not be a wise idea.
The first logical reason is - a stock that has done well and is expected to do well is preferred by most investors which is why it quotes at 'high' price whereas shares of a company that has not done well and may not have a great future languish at low levels. No wonder penny stocks in most cases disappear from the trading screens than making it to the top รข€“ it is an unwritten law of the market. It is not necessary that the story you heard of someone buying thousands of shares of a stock at Rs 8 and then selling it at Rs 1000 has to be false. But it is the exception that proves the law.
The second reason why a penny stock may not be cheap as compared to a high priced stock is the price it commands may not be true representative of the underlying value. For example, a company which has gone bankrupt may have its shares trading at Rs 5, when in reality the value of these shares may be closer to zero. A company that is doing extremely well and growing 30% year on year will see the stock prices zooming over a period of time. A share quoting in thousands - say Rs 5000, may actually worth much more and hence appear on the buy list of most analysts.
If one looks at valuation parameters such as price to earning, price to book value; many penny stocks appear costly, whereas high priced shares may appear much cheaper. For example, a stock quoting at Rs 5 may have earning per share of 5 paise, which boils down to price to earning ratio (P/E) of 100. A stock quoting at Rs 5000 may have earning per share of Rs 100, which means the stock is quoting at P/E of 50. Higher the p/e costlier the share. Put simply, in aforesaid case, share priced at Rs 5000 is actually cheaper than Rs 5 share and may have better prospects too.
Never buy a penny share because it is quoting at low price. Buy one if you know the business prospects - buy value and not the price, says the old wisdom.
It is tempting to buy 1000 shares of a stock that is quoting at Rs 3 than to buy one share which is quoting at Rs 3000. For some the thrill of buying hundreds of shares (large quantity) pushes them to buy a penny stock - a stock quoting at an absolute low price. For some Rs 3 is very cheap and accessible whereas Rs 3000 is too costly to buy. Whatever be the reasons, many individuals are seen chasing the next Infosys and next Larsen & Toubro. However, chasing penny stocks just because they are quoting in single digits may not be a wise idea.
The first logical reason is - a stock that has done well and is expected to do well is preferred by most investors which is why it quotes at 'high' price whereas shares of a company that has not done well and may not have a great future languish at low levels. No wonder penny stocks in most cases disappear from the trading screens than making it to the top รข€“ it is an unwritten law of the market. It is not necessary that the story you heard of someone buying thousands of shares of a stock at Rs 8 and then selling it at Rs 1000 has to be false. But it is the exception that proves the law.
The second reason why a penny stock may not be cheap as compared to a high priced stock is the price it commands may not be true representative of the underlying value. For example, a company which has gone bankrupt may have its shares trading at Rs 5, when in reality the value of these shares may be closer to zero. A company that is doing extremely well and growing 30% year on year will see the stock prices zooming over a period of time. A share quoting in thousands - say Rs 5000, may actually worth much more and hence appear on the buy list of most analysts.
If one looks at valuation parameters such as price to earning, price to book value; many penny stocks appear costly, whereas high priced shares may appear much cheaper. For example, a stock quoting at Rs 5 may have earning per share of 5 paise, which boils down to price to earning ratio (P/E) of 100. A stock quoting at Rs 5000 may have earning per share of Rs 100, which means the stock is quoting at P/E of 50. Higher the p/e costlier the share. Put simply, in aforesaid case, share priced at Rs 5000 is actually cheaper than Rs 5 share and may have better prospects too.
Never buy a penny share because it is quoting at low price. Buy one if you know the business prospects - buy value and not the price, says the old wisdom.
Happy Investing
Source:Moneycontrol.com
nice bro...............
ReplyDeleteThanx Madhan, glad you liked it
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