A penny stock trades at a very low price, usually below Rs 10, or is issued by a company whose market capitalization is less than Rs 100 crore. The term originated in the US and was used for stocks below $5.
About 25 per cent stocks on the Bombay Stock Exchange, or BSE, trade below Rs 10. On the National Stock Exchange, or NSE, the figure is nearly 10 per cent. The market capitalization of one-third companies on NSE and two-third on BSE was less than Rs 100 crore on 9 March 2012.
GAMES PEOPLE PLAY Low prices make manipulation easy. This is because manipulators can use a small investment to trigger a spike. For example, a Re 1 stock can be easily pumped up to Rs.2, a lucrative 100 per cent return that can attract a lot of investors. This is usually backed up by spreading positive 'reports' about the company. After the stock rises, the manipulators sell out fast, triggering a crash and leaving small investors in the lurch.
Still, penny stocks can be a good investment. "Penny stocks can become multi-baggers by rising from, say, Rs.5 to Rs.50 in less than a year, whereas a blue-chip company like Reliance Industries will find it difficult to give 10 times returns in even 10 years," says Kishore Khot, equity strategist, HBJ Capital, which does research on penny stocks along with mid- and large-cap stocks.