Penny stocks in India: Should one invest in penny stocks? How I invest in them? Remain invested in DHFL/Yes Bank/Jet Airways or they will become penny stocks soon?
In the US the penny stocks are the ones trading at or below $5 per share.
In India, we don’t have an official definition of penny stocks. Some consider the single-digit price of under ₹10 as penny stocks where others use the level of ₹5 and lower.
My view is, any company with a price of under ₹21 is a penny stock. The reason I have a price level of ₹21 is, I have seen stocks breaking the level of 21 goes down sharply on huge volume.
What are some of the Common Penny Stocks in India?
With the definition of penny stocks, it is relatively easy for anyone to get a list of penny stocks using site like Screener.
As on 8Sep2019, here is a list of penny stocks.
Feel free to edit the price as needed to see the current list of penny stocks in the Indian market.
Should One be Investing in Penny Stocks?
The most important question for an investor is, should one consider investing in penny stocks.
I am sure you are looking for a definitive answer as to whether one should invest or avoid. The truth is no one answer fits all.
There can be investment opportunities in a penny stock for sure, but then most of the penny stocks are penny stocks for a reason.
There can be various reasons for stocks to have such a low price. The most common of it in India is the business has done poorly. So the stock price has been punished. If you are considering to invest in such penny stocks, it is an avoid.
Again there can be a counter argument where the business isn’t doing as badly as the price. The price is low because of the future growth prospect. These penny stocks can be considered for investing.
Try to formulate a set of rules, and if a penny stock passes those set of rules, it can be worth investing but not otherwise.
How to Find Good Penny Stocks in India?
The first aspect to finding good penny stocks is, you have to find it. No one else can find it for you.
If I find a pot of gold, I will keep it to myself. It is correct for anyone on this planet in the 21st century.
If you think someone will find a pot of gold for you and hand it over to you for a few bucks, you are either on the wrong planet or in the wrong era.
As I said earlier, you have to find your process of investing and invest accordingly. I have my own set of investment checklist, followed by companies fundamentals. Lastly, I have a business checklist. If a penny stock passes all of those, I am fine investing in it.
Feel free to use the same rule or bend them as per your style of investing. There is no general rule as to my rules are golden, and others are BS. All rules are okay as long as they help you start investing.
How to Predict if a Penny Stock will go Up or Down?
The best way to look at penny stocks is, assume all the penny stocks will go down.
Aban Offshore from high of ₹5000 to currently trading at ₹25. Technically still not a penny stock :D. Pun Intended.
Or Punj Lloyd from high of ₹600 to currently trading at ₹1 and a penny stock by all means.
So once you are sure all the penny stocks will go down, if can you find a business that will not go down further, the penny stock may be worth investing but not otherwise.
More often, the underlying business of a company where the share price has become a penny stock is loss-making.
So, when investing in them, the critical aspect isn’t the price but the underlying business. Try to find an answer to the questions like:
- Has the company turned profitable?
- Can the profitable operations continue for an elongated period?
- Is business and the management doing the right things now?
- Can the business not make a loss from here on?
- Is the management will to do whatever it takes. In short, are they great (good may not be enough)?
- What was the reason for stock becoming a penny stock?
And after you find the answer to those questions, don’t invest at the lowest price point. Let the business rise along with the stock price.
Remember this quote of Warren Buffett.
It’s far better to buy a wonderful business at a fair price than a fair company at a wonderful price. – Warren Buffett
Let the company become a great business.
How I prefer Investing in Penny Stock?
I will share an example of investing in a penny stock Waterbase. It was indeed a penny stock and trading under ₹10 in 2013.
The company had a debt payment issue. From the management point of view, it was a false positive, and Bank of Baroda pulled them court wrongly.
The management was so confident that they formed a second company as a subsidiary company of the parent company. The reason for the formation of a subsidiary was they couldn’t expand the business in the parent company because of the debt matter.
The stock was in my radar and can see they wanted to fight the bad times out. The management was taking the right step to consistently profitable operations. Moreover, they were ready to do whatever it takes to fight and turn things around.
As the business turned around, the stock started rising. When the stock hit 3 figure mark with business reflecting the same, I invested in the stock for the first time in 2016.
Are DHFL/Yes Bank/Jet Airways Penny Stocks?
I don’t know.
But what I know for sure is, if the business can prove its metal, even if they become penny stocks, the share price can bounce back and not otherwise.
And remember, there are very few stocks which can make it happen.
So ask yourself the question, can the management make it happen?
If you have the answer with a conviction, stay invested but not otherwise.
For Jet Airways, my view is, SBI has killed it. The business was in trouble, but now the business doesn’t exist anymore. Only assets are for sale.
For DHFL and Yes bank, the going is tough. The question is, can they keep going and rise or they fall apart – only time can tell.
Awesome article as always shabbir.
Glad you like it.