Skip to main content

What are penny stocks and how brokerage is charged on them ?

By
shutterstock_318403538Stocks which are traded at very low price and have low market capitalization as well are called penny stocks.This concept of penny stocks is originated from USA and word is derived from the unit of currency known as “penny”. Such stocks exist in Indian stock market also and are usually priced below Rs.10.However, all stocks which are priced low are not penny stocks.There are some companies trading at a low price because of small face values but are large companies with large market capitalization.Penny stocks and penny business are often used interchangeably in the stock market but they are not at all same.To trade in stock market having a Demat account and the trading account is mandatory.

Some characteristics of penny stocks
  • Poor business fundamentals and disclosure.Financial information is not easily available.
  • Very low market capitalization (>50-100 crores).
  • They usually belong to small companies which are traded infrequently.
  • No institutional shareholding exists.
3

Guidelines to follow when you go for trading in penny stocks

1)If a stock is available at a low price it does not indicates that it is cheap.Sometimes they are even traded at expensive valuation with no PE ratio.
2) Select stocks that are having good liquidity.Have a confirmation that it will follow the upward trend and belong to the company which is capable of earning a profit.
3)Get a proper education on these stocks by learning through resource available on Internet, books, and newsletter. Do not risk your money immediately without having knowledge about it.
4)As penny stocks have low volumes it is easy for some big market participant with a particular interest to manipulate stocks.Traders should be aware of such operators.Often we read success stories of earning high returns in less time by buying penny stocks.Do not get fooled by such stories and gain sufficient information from authentic sources before investing your money.
5)The risk associated with trading in such stocks is high and it is difficult to sell them as they are highly illiquid. Do not commit your large portion of a portfolio in it.Keep it less than 2-3 scripts.

Brokerage charges while trading in penny stocks

Full-service brokers charge some minimum brokerage per share.For example- If you are trading in a stock whose price is Rs 5 then instead of your normal brokerage slab you will be charged with a minimum brokerage slab per share.Normally if the brokerage is charged at Rs 0.5% your brokerage will be Rs 0.05/share.But as you have to pay some minimum brokerage charges also along with this it will increase your final brokerage amount.This is done by brokers to increase the brokerage charge on transactions of small value.
Services of discount broker can be opted to remove this burden of high brokerage. Pehla Trade a growing discount brokerage firm charges brokerage on every executed order which is very less to that which is charged by full-service brokers.Traders should be very careful with the brokerage amount which they are are paying for trading in penny stocks as it will affect their profit.
Labels:

Comments

Post a Comment

Popular posts from this blog

What is MIS, NRML and CNC order types in stock market ?

By
MIS (Margin Intraday Square Off) MIS order types are for intraday traders and need to squared off during the same trading day. It will be activated till that particular trading day only.The biggest advantage of this order type is that while buying shares using it traders need not to pay the entire amount only a margin amount is required to be paid.Because of this feature traders can buy more number of shares with less capital. If in case position is not squared off or converted into other order types by the traders end then it will be automatically squared off by RMS few minutes before the market closes. If you want to strictly trade on intraday basis then you can rely on usage of such order type. As here you need to worry about squaring off your position, it will automatically get squared off before market closes. NRML (Normal Order) NRML order type is used while trading in future market. It is used to carry forward trade orders in derivatives segment. This order type w...
Post a Comment
Read more

Buy back stocks: Meaning, advantages & disadvantages.

By
Meaning of buy back stocks Buyback stocks is a process where companies repurchase its stocks from stockholders or open market. This is generally considered to be a good sign as it is one indirect way for companies with surplus cash to maximize the wealth of its stockholders.A company with surplus cash prefer to buy its stocks when current market price of stocks is less than book value or what they expects it to be. Companies buy their stocks at a premium price and this leads to increase in stock price. Possible reasons for buyback are discussed below: 1) To increase stockholders value as company uses its surplus funds which is not suitable for any investment options it results in higher earning per share. 2)For protection against corporate takeovers. Buyback helps in increasing the promoters holding thereby reducing the chances of takeover. 3)To improve financial ratios as buyback reduces the cash component on companies balance sheet. Advantages of buyback : 1)Com...
Post a Comment
Read more

How to open a Demat account and what benefits are offered by dematerialization?

By
With the introduction of new technologies trading in the stock market has changed a lot. Earlier when BSE was formed in 1875 at that time traders and investors used to stand on floor and shout prices of stocks for buying and selling. The money was exchanged between buyer and seller and a physical copy in the form of certificate was issued to the buyer.The entire process was very time-consuming. In 1996 concept of dematerialization was introduced in share market. Physical copies of shares were replaced by electronic form and were credited and debited from the Demat account of a trader. Following are the benefits offered by dematerialization : 1)Common bank In Demat account along with shares, other financial instruments like bonds can be stored as well. Traders can use the same account to trade in stocks and bonds both. 2)Time and cost To deliver a physical copy of shares cost is involved and also it takes the time to do so. With dematerialization, this cost and time c...
Post a Comment
Read more