Lockdown led to emergence of "Robinhood traders" who propelled rally in penny stocks

Umesh Mehta

Since March 2020, prices of penny stocks have witnessed an enormous jump. Many shares surged in the range of 2-10 times and hit their multi-year highs.

The key reason behind this massive rally in penny stocks is the army of first-time investors/traders entering markets, popularly called as "Robinhood Traders" or "Internet Traders".

Retail investors have always been known for bottom-fishing in the hope of getting outrageous returns in a very short period.

The wealth creation study that we conducted in late 2019 confirmed this theory that the number of retail investors in penny stocks was up to 3-times more than in quality companies that have actually created wealth for its investors.

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Umesh Mehta

Head of Research|SAMCO Securities

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Even stocks with "zero equity value" such as GTL Infrastructure Ltd., Suzlon Energy Ltd., and Jaiprakash Associates Ltd. have more than doubled since April this year.

Once the trend reverses, which is inevitable, such stocks usually open in lower circuits for weeks, trapping investors. There are numerous cases where the share rose with back-to-back upper circuits and fell with unending lower circuits. Few recent examples are of Sintex Plastics Ltd, Alok Industries, and GTL Infra etc.

With the advent of technology, opening a trading account and trading/investing in stocks has become as easy as playing games on mobile phones, but that does not mean retail investors are equipped with the skills needed for stock picking or trading.

Just as making prescription medicines available free of cost and without any monitoring or oversight or someone driving a multi-axle truck without license or training could destroy their health, trading/investing without proper knowledge or guidance could be extremely dangerous to the financial health of investors.

Few important points for first-time traders/investors -

1) First things first, know that we are in a challenging time, so take care of your expenses for the next 24 months and then only invest whatever surplus you have.

2) Avoid buying stocks of beaten-down names. They are beaten down for a reason. Avoid companies with high levels of debt, promoter pledges, inconsistent earnings, poor cash flows, low return ratios.

3) Don't convert your trade positions into investments when trade moves against your direction. Keep and follow stop-losses religiously.

4) Do not enter markets with unreasonable return expectations of 50-100% per annum. Even 15-20% is perfectly fine. Warren Buffett has amassed billions of dollars by consistently making just about 21%.

5) Nothing changes as far as how investors will make money - Invest regularly in portfolios of quality companies with a strong balance sheet and consistent earnings.

Especially for someone who does not understand markets and its intricacies well, should invest in baskets of stocks created by market experts and can also invest using SIP feature.

(The author is Head of Research, Samco Group)

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.