What Are Penny Stocks? Risks and Rewards

In the Indian stock market, penny stocks are like the local kirana shop compared to a Big Bazaar. They may look small and unattractive, but some can turn out to be hidden gems, while others may shut down overnight. Here we will simplify what penny stocks are, their risks, rewards, taxation, and when (or whether) to invest in them.

What are Penny Stocks?

Penny stocks are very cheap shares, usually under ₹20, of very small or new companies. “Penny” doesn't mean 1 paisa! It’s just a nickname because they’re super low-priced. These companies are usually:

Small in size (not big names like Reliance or TCS)
Not very famous
Can be new or struggling
Listed on small exchanges or sometimes not even listed properly

For example, buying a penny stock is like buying a stall in a small local mela (fair), while big company stocks are like buying a shop in a big mall. Cheap to enter, but risky.

Example of Penny Stock

Here are some examples of Penny stocks for more understanding:

Imagine you buy 2,000 shares of a company called Prime Urban Ltd. at ₹2 per share.

Total investment = ₹4,000
Share price jumps to ₹ 9 per share.

Now, 2,000 shares × ₹9 = ₹18,000
That’s a profit of ₹ 14,000 on your ₹ 4,000 investment.

How Penny Stocks Work?

It works like a normal stock; the difference is that when you buy a penny stock, you own a tiny piece of that company. If the company does well, the price of your stock goes up. If the company does badly, the price goes down. You make money if you sell your stock for more than you paid. You lose money if you sell it for less than you paid. Let’s see some real examples of penny stocks:

Stock Name	Price Range (Approx)	Sector	Why People Watch It
Prime Urban Ltd.	₹2 to ₹9	Textiles	Investors expect a revival in textile demand
Bridge Securities Ltd.	₹7 to ₹9	Financial Services	Some watch it, hoping for a revival or a takeover
Ontic Finserve Ltd.	₹1	Finance/Investments	Looks like a turnaround story, but risky
Glittek Granites Ltd.	₹3 to ₹5	Construction Materials	Sharp jump in price & profitability recently
City Online Services Ltd.	₹8	Internet / IT Services	Some think it might benefit from India’s digital push
Starlineps Enterprises Ltd.	₹0 to ₹6	Retail & Distribution	Small-cap company with little information
Franklin Industries Ltd.	₹0 to ₹2	Food & Agriculture	Some believe it's undervalued, but speculative

Risks of Penny Stocks

Image generated with ChatGPT

Penny stocks are very risky. Let’s break it down in the most basic way:

Risk	Explanation
Price Volatility	Price can fall 50% in one day
Scams	Fake tips, pump-and-dump frauds
Company Shutdown	The company can go bankrupt (close forever)
Can’t Sell Shares	No buyers = you're stuck
Dilution Risk	The company prints more shares = the value drops

It's like buying a second-hand scooter, which looks okay, but might break down anytime.

Rewards of Penny Stocks

Yes, rewards do exist, but you need luck, skill, and timing. Here are the positives:

High Returns: If a stock goes from ₹10 to ₹100, that’s a 10x return
Low Entry Money: Start with ₹1,000 to ₹5,000
Quick Profits (Sometimes): Prices can move fast, both up and down.

When Should You Avoid Penny Stocks?

Don’t invest in penny stocks if:

When You Don’t Know Much About the Company:

If the company doesn’t share its financial details or is not on big stock markets like NSE/BSE, it's better to avoid it.
These companies are often not talked about by experts.

If It’s Being Overhyped Online:

If you see people pushing a stock a lot on WhatsApp, Telegram, or YouTube, without any real reason, it could be a scam.
Big price jumps without any news are a warning sign.

Business Doesn’t Make Sense:

If the company has no stable income or a clear plan to make money, don’t trust it.
Some are just selling ideas, not real products.

Very Few Buyers and Sellers:

If hardly anyone is buying or selling the stock, you might get stuck with it.
You may not be able to sell when you want to.

The company is in Bad Shape:

If a company has a high level of debt, no profits, or very low sales, it’s too risky.

If You Need Quick Money or Can’t Afford to Lose:

If you’re using borrowed money or you’ll be in trouble if you lose it, don’t invest in penny stocks.

If You’re Buying Too Many Penny Stocks:

These should be a small part of your investment, just for fun or risk-taking, not your main plan.

Conclusion

In conclusion, Penny stocks are like lottery tickets in the stock market. Sometimes, you hit the jackpot. But most of the time, you lose your money. If you’re playing with money you can afford to lose, then maybe try with a very small amount. But if you’re investing your salary, savings, or family money, then stay away. We hope this blog has been helpful to you.

About the Author

Saniya

I'm a finance content writer with a BBA in FinTech, passionate about simplifying money matters for everyday Indians. I break down complex topics like investments, savings, and digital finance into easy, relatable content. My goal is to help you in a way that’s easy to understand, jargon-free, and actually useful in real life.

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