What are penny stocks? Can they generate profit?

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Penny stocks are one of the best options to sky rocket our portfolio.But not all penny stocks do it and investors need to analyse them before putting money on them.

We humans get attracted easily to things which give easy money. It’s natural.Isn’t it? So most of us are always looking for multibagger stocks which can make millionaires some day.

Blue chip companies are one of the best options for investment keeping risk in mind. But not all blue chip companies generate millionaires in a short time.

What Are Penny Stocks?

In USA, Penny stocks are shares of small companies whose share price is trading below $5 per share. It means penny stocks are those whose shares are available at very low prices. Low prices allow investors to buy shares in a bulk quantity in anticipation of huge profit in the future.

One should analyse the balance sheet, debt-equity ratio, share dilution or outstanding shares , management profile, sector and its growth prospectus in the future before putting money into them.

Good management and growth prospects can drive the share price over multiple times.

Let’s see an example:

Eicher motors shares were trading around 17 Rs in August 2001. Share prices sky rocket over the time and hit an all time high of 33480 in Sep 2017 translating into profit of over 196841.17 per cent. This happened only because of a brilliant management team who drove the persistent growth of the company over this time period.

If I had invested 1,00,000 rupees in Eicher motors, my net worth could have been 19,69,41,176 Rs at peak of share. At current price , it comes around 8,41,00,000.

But poor management and debt can turn the blue chip company into penny stock.

Unitech is an excellent example of turn around in price action.

Unitech share was trading around just 0.30 in 2000-01. With growth of the company it reached an all time high of 546.8 in early jan 2008. It was India’s second largest real estate company after DLF in those days.

But now again it’s shares are trading around 1.79 Rs as promoters of the company are facing investigations over money laundering and diversion of funds meant for housing projects along with rising debt and slide in the growth.

The Unitech example also highlighted the importance of timing of exit to pocket handsome profit.

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