Buying large quantities of penny stocks is a great long term investment instead of buying lesser quantities of known companies.
This is the biggest misconception I had in my mind during my initial years when I started trading. Many people have lesser capital when they start, so if you have Rs.10,000 capital, what do you prefer?
- 3 shares of TCS
- 2200 shares of Sintex Industries
Obviously, we tend to prefer buying Sintex stock than TCS. Because we believe Sintex has more potential to move up. We think Sintex moving from Rs.4 to Rs.8 is possible than TCS moving from Rs.3000 to Rs.6000. So we bet on stocks like Sintex, expecting to make some quick gains.
But what we don’t think about is risk in such stocks, if you think Sintex can move up from Rs. 4 to Rs.8, it can also come down to Rs.2 as well. Penny stocks are vulnerable for rapid down move. You can easily lose 50% of your capital. But with stocks like TCS, that’s not possible. Such large cap fundamental stocks wont drop 50% and wont move 100% like penny stocks.
We tend to think that holding huge quantity of penny stocks could create enormous wealth in the long term. We might think even many big stocks were once a penny stock, so we tend to believe investing in such penny stocks with 10000s of shares can end up giving huge returns 5 years, 10 years down the line.
With penny stocks, yes you can make huge returns once in a while, but also risk of losing is also equally high. Always invest in penny stocks only with the capital you can afford to lose.