Penny stocks are stocks of small companies that typically trade at a relatively low price, often below a certain threshold set by the stock exchange. In India, penny stocks are usually those that trade at very low prices, often below ₹10 or ₹20 per share. These stocks are often associated with small market capitalization and limited liquidity.

Here are some key characteristics of penny stocks:

Low Price: Penny stocks are characterized by their low share price, which can make them attractive to investors looking for potentially high returns.

Small Market Capitalization: These stocks belong to companies with relatively small market capitalization, indicating they are smaller and less established compared to large-cap companies.

High Volatility: Penny stocks tend to exhibit high price volatility, with prices fluctuating significantly over short periods. This volatility can present both opportunities and risks for investors.

Limited Liquidity: Due to their small market capitalization and lower trading volumes, penny stocks may have limited liquidity, meaning it can be challenging to buy or sell large quantities without affecting the stock’s price.

Higher Risk: Investing in penny stocks carries higher risks compared to investing in more established companies. These risks include but are not limited to:

a. Market Risk: Penny stocks are susceptible to broader market trends and economic conditions, which can impact their prices.

b. Company-Specific Risk: Many penny stock companies are small and may lack diversification, making them more vulnerable to business-specific risks such as competition, regulatory changes, or financial difficulties.

c. Liquidity Risk: Limited trading volumes can result in wider bid-ask spreads and difficulty in executing trades at desired prices.

d. Volatility Risk: High price volatility can lead to rapid price movements, both upward and downward, increasing the potential for significant gains or losses.

e. Fraud and Manipulation: Due to lower regulatory scrutiny and transparency compared to larger companies, penny stocks can be more susceptible to fraud, manipulation, and pump-and-dump schemes.

Investing in penny stocks requires careful research, risk assessment, and due diligence. It’s essential to have a diversified investment strategy, manage risk effectively, and consider consulting with a financial advisor before investing in these highly speculative securities.