Sometimes, it is difficult to understand the psyche of the investor. In a bull market, when the markets are booming and almost all stocks have run much ahead of valuation, hunting for penny stocks comes naturally, or should we say, is any hunter’s instinct. But in a bear market, when blue chips are better priced and hold promise of bigger gains when times improve, even then this pursuit for penny stocks?

We have many investors/traders posting us queries on the website, asking for some penny stock ideas. The only question which comes to mind is “why?” This search for the elusive pot of gold at the end of the brilliant rainbow is what puts traders at risk. And this is a dangerous time to be on the hunt for penny stocks and it is actually the perfect time to stand back and look at where and what we are investing in. Wait for the dust to settle before you take a call on large cap stocks too!

The one omnipresent character of all traders buying and selling shares on the bourses is greed. Even if a trader, in a particular stock is in handsome profits, he continues to hold, hoping to make more. And then
there are the other traders, the high-risk traders, who want to invest only in small cap or penny stocks and hope that one day it becomes a mid-cap stock. But does that happen? Maybe we come across a few random cases; there are stories of more losses than gains, yet traders keep a selective memory and buy into penny stocks, only to get trapped.

Penny stocks are characterized by scams, with management and manipulative brokers having one point agenda – to snarl susceptible traders. These stocks typically have volatile price variations. The most telling pointer is when a stock has a pitiable volume of trade but yet manages to hit a new high with even 100 shares traded. Market cap is usually very small. Risk is very high, with dubious credentials of the management. Buying into such stocks is easy but try selling it when the price rises and you will know the true meaning of being trapped in a penny stock. Lack of liquidity and high volatility should be the big blaring warning signs. Delisting is a frequent phenomenon. Brokers go overboard recommending these stocks and SMSes are often used to sell these stocks. Despite all these facts, people constantly ask for advice on which penny stocks to buy.

Another major characteristic of this stock – there is no FII holding. A quick retort from a punter for the same – which is why one should buy into this stock now! But what happens when markets settle down and you get stuck in such illiquid stocks?

Remember, there is never a perfect time to invest in stocks or the stock market, but there is a right time and a wrong time.

Take a look at these stocks which have been hitting new highs: