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

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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.
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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.
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