Multibagger Penny Stocks: Risky Or Rewarding
Feb 22, 2019 | 12:40 PM IST
Feb 22, 2019 | 12:40 PM IST
The usual trap where every newbie investor gets trapped is multibagger penny stocks. These stocks trade at the most discounted prices. That's why investors initially fell in love with these stocks as prima facie these stocks seemed to be the highest profit yielding stocks. But does it makes sense in investing in such multibagger penny stocks?
Though these stocks appeal to you in the first view and can generate enormous wealth for you. But there is a dark side to these stocks which you should understand before investing in these stocks. Investing in these so-called multibagger penny stocks can turn to be lethal if you are unaware about the risks associated with these stocks. Come on let's explore these multibagger penny stocks in detail.
Meaning of Multibagger Penny Stocks
While investing in the stock markets you have heard this phrase 1000 times, even have also tried to pick these stocks. But have you ever wondered its meaning? Multibagger penny stocks are the stocks which belong to the small-cap category. That is these stocks are attached with the smallest capitalization as well as lowest prices. Let's go ahead and understand why investors tend to buy these multibagger penny stocks.
Why People Tend To Buy Multibagger Penny Stocks
Lack of Information
Quick Money Attitude
Multibagger penny stocks appeal more to the investors who are short of investment capital. These investors try to find out the stocks with the lowest price with an assumption that they can play quantity games and earn huge profits. This is indeed a wrong approach to stock market investment though many investors follow this attitude initially. Famous investor Warren Buffet has said that Price Is What You Pay For Value What You Get. But here in the hope of buying multibagger at a lower price you are buying an extraordinary risk and not the value.
With the lower prices and higher volumes the fluctuation in the prices of these shares is high. Due to which trader and newbie investors sees huge return potential in these stocks.
Lack of information is one of the most prominent causes behind the consideration of these stocks for buying. As these stocks are from the small capitalization categories the information for these companies as not that easily accessible. Investors in an illusion of aggressive price movements buy these stocks.
Investors see the leaps taken by these kind of stocks. And fall in love with those huge returns. These stocks have the ability to offer you great returns overnight. So in the hurry of earning higher returns investors pick these stocks.
Risks Involved In Multibagger Penny Stocks Investing
Rewards Are Notional
Game of Pumps And Dumps
Inconsistency In The Performance
Prone To Scams, Bankruptcy And Insolvency
Even A Rumour Can Spoil Your Returns
In the case of multibagger penny stocks, the liquidity risks are higher. Though you may see higher quantities of shares are available at the marketplace but in reality it's limited. Basically, all the stocks listed on the stock exchanges are been aligned to certain circuit limit. Circuit limit defines the non trading of stock if it reaches a specific level. As these stocks are available at a cheaper price the price movement with every transaction makes a difference. These stocks can take a leap of 5-10% which is usually its circuit limit. Ultimately you will face issues to BUY as well as SELL these stocks. That is there may not be a buyer when you want to sell the stock and vice versa. This leads to unnecessary holdings in your portfolio and at the point of sudden and panic crashes your multibagger penny stocks turn your portfolio in red.
The price which is the most attractive part of these stocks but at the same time, it makes it much more volatile. As these stocks trade at a lower price and traded in the smaller lots, the handful investment can spike up and down its prices. Higher volatility leads to higher risks.
It's a common saying in the stock markets, higher the risks higher the returns. But in the case of the multibagger penny stocks, this common notion seems to be incorrect. Here, the probability of higher reward is too less. Maybe 1 or 2 stocks from these penny stocks may reward you high returns.
There are many cases where investors have waited for price rise and ended up making losses. Due to higher volatility and aggressive price movements, it becomes difficult to understand the trading patterns. Owing to which the peak points where the investor should exit are undefinable. This, in turn, minimizes the investment returns.
Because of the lower market capitalization, these multibagger penny stocks can be manipulated easily. Any major trader or investor can pump in a huge sum and drive the prices of the stocks. That is these investors buy the huge quantities of these stocks which drives volumes and further prices. These price movements create an illusion of heavy demand in front of the investors. And then amateur investors start pumping in the money without knowing the truths. When fellow investors start pumping in the money and drive prices, the initial investors get the chance to exit. And with the exit of the huge volume of quantity stock prices start trending down leaving amateur investors stuck in their investments.
Many of the investors usually bet on the penny stocks for multibagger returns by looking at its business model. But it's really difficult to post good results every time. Good performance in the initial quarters is not enough to become a blue chip or multibagger stock. These small-cap companies need to post good annual performance for the years which can build the credibility of the company where major of the companies lacks behind. Inconsistency in the performance ultimately leads to getting out of the race and at the end, you end up adding a junkstock in your portfolio with no movement.
These thinly traded low price penny multibaggers are prone to scams. As discussed earlier that stock prices of these stocks can easily be manipulated and dominated, so these stocks are prone to scams like Harshad Mehta scams. However, recent bankruptcy filings from industries like Jaypee Infratech, R-com are eye-openers. If the players who've been in the markets for the years and turned loss-making then should you believe such penny stocks which are driven by many bigger investors and the insiders.
These stocks are pretty much sensitive in the price trends. The rally and drag down can be witnessed in these stocks. So if someone spreads a bad rumor about the stock in the market, panic selling is expected to trap you ahead. Due to lower price bands and higher volumes stock reaches it's circuit limit even in the single bulk deal.
Conclusion: Should You Buy Multibagger Penny Stocks?
With all above discussion, it's crystal clear that there is no intelligent reason to invest in the multibagger penny stocks. These multibagger penny stocks traps you in the higher risks than offering higher rewards. So rather than turning to a multibeggar, pick the right multibagger stocks with us. To know our suggestions on multibagger stocks for 2019 read, Best Multibagger Stocks And Sectors For 2019.