Moneycontrol
Jan 11, 2018 01:42 PM IST | Source: Moneycontrol.com

What to do if you are stuck in penny stocks? These 3 experts help to answer your question

Penny stocks, which look attractive price wise as well as return wise, could become a burden if investors are not able to exit from them. Low liquidity makes tough for investors to take an exit whenever they want.

Kshitij Anand @kshanand

Making money in stock markets is not only tough, but challenging and especially when your portfolio consist of non-performing stocks, highlight illiquid ‘penny stocks’.

Penny stocks, which look attractive price wise as well as return wise, could become a burden if investors are not able to exit from them. Low liquidity makes tough for investors to take an exit whenever they want.

To address the issue, the Securities and Exchange Board of India (SEBI) plans to impose a limit on the minimum market capitalization for companies to remain listed in an effort to weed out so-called penny stocks, Mint reported on Wednesday quoting two people who were aware of the development.

The report further added that SEBI is considering a free-float market capitalization of Rs 10 crore for companies to remain listed, these people said. The free-float market cap is the value of publicly traded shares.

At present, there is no such criteria for continued stock liquidity in India. However, exchanges such as BSE and the National Stock Exchange stipulate a minimum market capitalization of Rs25 crore at the time of listing, it said.

Data from AceEquity showed that at the end of trading on Tuesday, there were more than 600 companies with a market capitalization of less than Rs10 crore.

Note: The list is only for reference and not a buy or sell recommendation from Moneycontrol.

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Analysts’ see this as a very positive move from the market regulator to safeguard the interest of small retail investors. If the regulator sets these rules and eliminates companies with low liquidity or thinly traded company straight from the market, it would be in the interest of research houses as well as investors.

“If SEBI is planning this, I must say it’s a great step by the regulator. This is completely in the interest of amateur investors and investors with low capital,” Shubham Agarwal, CEO & Head of Research at Quantsapp Private Limited told Moneycontrol.

“Every investor has their own way to start their investments in the stock market but the most common one in direct investment, is to identify penny stocks which can double quickly and is generally not possible in large caps,” he said.

He further added that SMS & Mail frauds etc. are a known fact where investors receive tips of such companies and in the greed of making money they lose large portions of their capital.

Last year, there were multiple crackdowns by SEBI to normalize things and make sure the efficiency of markets remain in place.

“Over last few years, there has been an enormous rise in terms of speculative messages luring investors to put hard earned money in these penny stocks. Having a healthy market is what can do wonders for investors,” Mustafa Nadeem, CEO, Epic Research told Moneycontrol.

If you get stuck in penny stocks here’s what experts suggest you do:

VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services:

Penny stocks have been the bane of Indian stock markets for quite long. They have been a problem in developed stock markets too; that’s why some developed markets introduced market cap-floors to address this problem.

Well, existing investors in such stocks can be given a time window of few months to exit. Penny stocks have poor liquidity. Therefore, a norm for liquidity – minimum number of trades for a given period- also can be considered along with the minimum market cap.

Mustafa Nadeem, CEO, Epic Research:

Sell - out and forget it. These are best options for investors to follow as liquidating them and forgetting them is the best can be done and as soon as possible. Since any investment based on hope and in a company that is just on a "paper" may not create even an iota of wealth.

Low liquidity is a big concern and everyone coming out to sell will further add insult to injury causing lower circuits. These investments should be exit over a period of time but the important point is should be fast since time is a factor here.

Shubham Agarwal, CEO & Head of Research at Quantsapp Private Limited

The only apt exit strategy in direct investing is to accept the mistake and move on. Hope’s doesn’t pay. Liquidity can sure be a challenge but a staggered selling could be a good strategy if companies are falling in the proposed criteria.

One must remember even if the stock is quoting low; there is at least a price available to sell it off and is still better than an exit plan after de-listing; if expected.

The only reason to stay call would be in a company who pays a consistently high dividend with good fundamentals and the only reason of de-listing is a low market cap. But investors sticking to these companies should be convinced for a long-term dividend forecast.

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