InvestorQ : Can penny stocks actually play both ways for an investor?
Nisha Chandani made post

Can penny stocks actually play both ways for an investor?

Nisha Chandani answered.
3 years ago

Back in 2001, at the peak of the 9/11 equity paranoia, there were a couple of large steel traders in South India who were aggressively accumulating SAIL at Rs.3/-. There argument was that if India has to grow and infrastructure has to expand then steel demand was inevitable. These traders were seeing tremendous traction in steel demand and realized which way the market was moving. For them SAIL was a good stock with a bad strategy and therefore available at ridiculous price. As steel traders themselves, they understood steel much better than most others. Not surprisingly, they made a real killing.

The biggest worry in most penny stocks is the management, which typically tries to use the market euphoria as an opportunity to exit their positions. It begins with a dose of managed news flow, some big bang order announcements and a few willing analysts singing paeans of the turnaround story. In case of SAIL, management was never the issue. But more often it is, especially if you go down to stocks with a more dubious background.

The biggest challenge in penny stocks is how to separate the wheat from the chaff. The likelihood of striking a multi-bagger penny stock is extremely low. It is almost like looking for a needle in a haystack. The difference between a low-priced stocks and a cheap stock is very hazy. But the biggest challenge in any penny stock is in identifying, buying and eventually holding on to the stock to exit profitably. That is the key.