Swapnil Shah, Head of Research, BP Wealth, said that investors in penny stocks have garnered huge returns after the Covid-induced market crash in March 2020.

Mr Shah said looking at the return data of penny stocks (share price in the range of Rs 0 to 20 as of July 2020), more than 850 stocks listed on the BSE have risen over 100 per cent in the past 18 months. Astonishingly, 102 stocks have risen over 1000 per cent in the same time period and 10 stocks have risen over 5000 per cent.

Shah said penny stocks are much riskier than larger stocks due to lower information and liquidity, but they do offer higher growth potential.

During rosy times, penny stocks tend to do extremely well. However, when things turn sour, they tend to tank, especially trapping retail shareholders. Thus, one should be careful and invest in penny stocks only after analyzing their fundamentals and knowing their risks, Mr Shah said. Mr Shah said penny stocks are generally considered those which trade in a single-digit or penny price or those which have a very low market cap. It's because they trade at lower prices that investors believe they can buy a huge chunk of shares and have that psychological satisfaction of owning them, he added.

Generally, a stock trading in penny price could be due to either very small size of the company, collapse of the business which resulted in heavy decline in shares, or financing problems. In the last three years, we have witnessed a large number of companies of decent size losing more than 90 per cent of their market cap due to various reasons, especially high debt, business failure, etc. In most cases, the promoters pledge their shares with bankers against the loan, Mr Shah said.