- Individuals often miss out on the right timing to offload the stake in penny stocks
- Certain instances that indicate a potential malpractice or a share price manipulation
- You shouldn’t bank upon the success story or anecdotal incidences told by others.
The gains in the stock market are largely dependent on the stock or asset you have selected, but the time of entry and exit also plays a significant role. People with a substantially high appetite for risk certainly have the bandwidth to deal with at least a few adverse share price actions in order to recognise a big gain afterwards.
While, on the other hand, the retail investors, individual traders and the people who have just started their stock market investing journey always remain in a lookout for assets that can minimise the overall risks and maximise the cumulative gains.
Individuals having a sizable exposure towards penny stocks or low-market capitalisation shares often miss out on the right timing to offload the stake as these shares continue to witness massive corrections, as well as upswings in a single day.
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The unconventional movements in the share prices of penny stocks are largely due to the low number of shares, relatively cheaper market prices as compared to mid-cap and large-cap shares and the lack of information & coverage.
It is always advisable to time your entry and exit right, the practice that can alleviate the chances of heavy notional losses. There are certain instances that indicate a potential malpractice or a share price manipulation. If you are able to observe any of the signals, then it must be the right time to square off the penny stock investment before it lands you under immense losses that are beyond your risk-taking abilities.
An unusual slump in the trading volumes for a number of times, without any major announcement or explanation from the company’s end is a clear sign of market manipulation. There is a high likelihood that the promoter group is diluting stake before a potential collapse. There could be a chance of secret information leak that poses hazardous risk to the company itself, challenging the ability of the corporation to continue the operations.
There are numerous instances when the company, looking adequately-established in the industry, shockingly reveals the plan to apply for bankruptcy protection, or a delisting procedure, or a penalising action by the capital market regulator or the central bank. All such occurrences have an immediate effect on the share prices with some stocks witnessing a 50% reduction in the market capitalisation in a single day.
You certainly can’t bank upon the success story of others or any anecdotal incidence of big gains as situations keep on changing with the emerging buying and selling pressure, interest in the stock, fundamentals, ongoing government policies and the profitability of the company.
An on-the-spot modification in the credit ratings of the company, an earlier-than-expected change in the analysts’ forecast, an unforeseen delay in periodic dividend payments, a default on the existing debt obligation and failure to repay the bondholders on time are the moments when there are troubles within the company.
Other than these, irrationally high proportion of the pledged shares, the involvement of the promoters or the founding partners in a legal proceeding, unreasonable price rise even after repeated quarters of losses, absurd plunge in the last couple of weeks and unjustifiable appreciation of share beyond the potential of the company also indicate that you should sell your holdings in the stock to avert losses.