A rising tide is said to lift all boats and the surge in the share market has done this with lesser known stocks, with a sizable number of penny stocks doubling in value in the past year.
Data compiled by the BS Research Bureau shows 206 of these scrips have given returns in excess of 100 per cent in the past one year. Of these, six gained more than 500 per cent. In contrast, the benchmark BSE Sensex rose only 22 per cent in this period; the BSE MidCap gained 32 per cent.
Penny stocks are those available in the Rs 1-10 range and with market capitalisation less than 100 crore. These are a high-risk investment, with low trading volume. They are not covered by most brokerages, which look at those with market capitalisation of Rs 300 crore and above.
"Most of these firms do not have a sound business model, fixed assets or income base. Retail (individual) investors should be cautious, as it is possible to lose 50-90 per cent (of ones' money) in these stocks. One can even lose 100 per cent if the stock is suspended," said G Chokkalingam, founder, Equinomics Research and Advisory.
Around a tenth of these scrips might rise for fundamental reasons but most are run-up by operators, who use the capital given by the promoters of these firms, he added.
Caution
Indeed, while a little more than 200 penny stocks have doubled in value, nearly 700 have also given negative returns in the past year. Of these, 138 shed more than half their value during the period.
"Investors get taken in by the euphoria and invest in penny stocks when the markets are rising, in the hope that these stocks will easily double in value," said A K Prabhakar, head of research at IDBI Capital Markets. "When the euphoria fades, investors are unable to exit due to the low liquidity and are left holding these duds."
Penny stocks that have shown a sharp surge in their prices have also come under the radar of stock exchanges. Recently, BSE and the National Stock Exchange have put 774 companies under a graded surveillance framework, wherein their securities shall be subject to enhanced monitoring. This is to alert and advise investors to be extra cautious while dealing in these and for market participants to do the needed due-diligence.
According to reports, the income tax department is also probing, on the expectation that people are laundering undisclosed money by manipulating listed penny stocks, to claim bogus long-term capital gain.