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Penny stocks — a magnet for retail investors and big gains amid market turmoil

Penny stocks, casually defined as stocks with a price of less than Rs 10, have been in dreamland compared to the rest of the market.

New Delhi / March 31, 2022 / 12:59 PM IST

Common sense says that stocks in the darkest alleys of the market tend to bleed more than their blue-chip counterparts during market turbulence.

The prospects of a tighter monetary policy abroad, rollback of the extraordinary liquidity provided by central banks and Russia’s invasion of Ukraine have seen benchmark indices give up more than 6 percent of their gains from their record highs hit in October. At one point earlier this month, they had nosedived 15 percent from the highs.

In the six-month period starting October, the average stock on the Nifty 500 index has declined 7 percent. Of the 500 stocks part of the broadest gauge of the Indian market, 345 have seen negative returns, data compiled by Moneycontrol shows.

On the face of it, the pain in the market has been broad and deep.

No pain, only gains

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Yet, climb down the market capitalisation ladder and one may find an oasis brimming with eye-popping returns generated just in the past six months of market turmoil.

Penny stocks, casually defined as scrips with a price of less than Rs 10, have been a dreamland compared to the bigger players. Out of the 110 most frequently traded penny stocks on the National Stock Exchange, 68 have seen gains since October. That is three out of every five penny stocks, according to data on AceEquity.

Some winners such as Vikas EcoTech have managed to triple investors’ money in the six-month period. Others like Ankit Metal & Power and FCS Software Solutions have soared 160 percent and 148 percent, respectively.

PENNY STOCKS GFX

The average gains for penny stocks in one of the most volatile periods for the domestic equity market since the outbreak of the COVID-19 pandemic stood at 24 percent, data shows.

The extraordinary performance of penny stocks becomes obvious when one considers the behaviour of their biggest backers– the retail investors.

Penny stocks have been the favourite of retail investors since perhaps the early days of the stock market, given the perception of value that such investors derive from the price and not fundamentals.

The average holding of retail investors among the 110 penny stocks listed on the NSE is 32 percent, reflecting the dominance of the cohort in this segment.

So, when one considers the fact that retail investors have pumped in close to Rs 1 lakh crore in the stock market since October 2021, the outperformance of penny stocks to some more celebrated counters becomes less of a mystery.

Crash and burn after the joyride?

That said, penny stocks’ joyride during the past six months could be in threat if inflows from retail investors slow down in the coming months.

Brokerage firm Kotak Equities believes that the strong inflows from retail investors have been a function of the stellar returns of the past year.

Based on rolling 12-month returns, the Nifty50 is higher by close to 18 percent even though it has fallen 6 percent in the previous six months.

Dhiraj Agarwal, co-head of institutional equities at Ambit Capital, told CNBC-TV18 on March 30 that the domestic market could remain volatile and range-bound with a downward bias for the remainder of the year.

“It will be a sort of gently down-trending market than a collapse,” Agarwal said.

If the forecast proves right, rolling 12-month returns could turn negative in the coming months, testing the resolve of retail investors.

The gentle decline for the rest of the market could become a raging storm for penny stocks.

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

 



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Chiranjivi Chakraborty
first published: Mar 31, 2022 10:33 am
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