Since the last few months, we have seen a massive rally in some of the midcap, small cap & penny stocks. Some stocks have given up to 200% returns in a space of 1-2 months while some have gone through the roof and given returns of up to 700-800% as well.
This is a very common behavior for the markets during a bull run. During bull rallies, people prefer buying small cap & penny stocks over large cap stocks. Why? Simple. Everybody has the one common emotion while trading or investing in markets and that is GREED. We all want to be the next Warren Buffet or Marc Faber. Domestically speaking, the next Rakesh Jhunjhunwala or Mr. R K Damani. Everyone wants to invest in a stock which gives them over 500 to 1000% returns over a period of time. These stocks are also referred to by broking houses as potential multi-baggers. What a majority of investors don’t understand is that even these top investors do a lot of research & more importantly posses the gift of forecasting the future potential of the company.
Why analysis is futile for these stocks?
A large chunk of these stocks which have rallied by over 300-400 % are majorly driven by operators. Basically this is how the operators work. Firstly they pick a penny stock with negligible volume. This helps them to buy large quantities and influence the price movement. Next they target all their clients to spread the word about e.g. XYZ stock which is currently quoting at Rs.X will move up by at least 3-5X in the next 3-6 months. Poor investors who have absolutely no idea about this XYZ bite the bullet and buy shares of this company. By the time, a majority of retail investors have entered this stock, the operator exits a huge chunk of his shares and majority of the time lets large number of retail investors high & dry.
While it’s not bad to be greedy as Michael Douglas once said ‘Greed is good’ in his movie The Wall Street, one must also understand the risks of investing in these kind of stocks. Even if investors enter these kinds of stocks, it is advisable to exit at least 50% of your investments once you achieve close to 70-100% returns. This might look foolish at the outset but always remember that only when you book profits, do you actually earn money. You are never paid for holding; your investments become profitable only when you book profits.
Many have asked us can’t we apply technical or fundamental analysis on these kinds of stocks. The answer is mostly no. These stocks generally have very poor fundamentals and hence are valued so poorly to begin with. Secondly, technical analysis works well only on stocks which have decent to very good volume. As mentioned earlier, these stocks have very low volumes and when they actually start attracting volume, they are driven by a handful of operators. Hence, moral of the story is invest in these stocks if you like to but also keep in mind the risks attached to it.
If you are interested in understanding more about technical or fundamental analysis, CLICK HERE to help us get in touch with you.
This is a very common behavior for the markets during a bull run. During bull rallies, people prefer buying small cap & penny stocks over large cap stocks. Why? Simple. Everybody has the one common emotion while trading or investing in markets and that is GREED. We all want to be the next Warren Buffet or Marc Faber. Domestically speaking, the next Rakesh Jhunjhunwala or Mr. R K Damani. Everyone wants to invest in a stock which gives them over 500 to 1000% returns over a period of time. These stocks are also referred to by broking houses as potential multi-baggers. What a majority of investors don’t understand is that even these top investors do a lot of research & more importantly posses the gift of forecasting the future potential of the company.
Why analysis is futile for these stocks?
A large chunk of these stocks which have rallied by over 300-400 % are majorly driven by operators. Basically this is how the operators work. Firstly they pick a penny stock with negligible volume. This helps them to buy large quantities and influence the price movement. Next they target all their clients to spread the word about e.g. XYZ stock which is currently quoting at Rs.X will move up by at least 3-5X in the next 3-6 months. Poor investors who have absolutely no idea about this XYZ bite the bullet and buy shares of this company. By the time, a majority of retail investors have entered this stock, the operator exits a huge chunk of his shares and majority of the time lets large number of retail investors high & dry.
While it’s not bad to be greedy as Michael Douglas once said ‘Greed is good’ in his movie The Wall Street, one must also understand the risks of investing in these kind of stocks. Even if investors enter these kinds of stocks, it is advisable to exit at least 50% of your investments once you achieve close to 70-100% returns. This might look foolish at the outset but always remember that only when you book profits, do you actually earn money. You are never paid for holding; your investments become profitable only when you book profits.
Many have asked us can’t we apply technical or fundamental analysis on these kinds of stocks. The answer is mostly no. These stocks generally have very poor fundamentals and hence are valued so poorly to begin with. Secondly, technical analysis works well only on stocks which have decent to very good volume. As mentioned earlier, these stocks have very low volumes and when they actually start attracting volume, they are driven by a handful of operators. Hence, moral of the story is invest in these stocks if you like to but also keep in mind the risks attached to it.
If you are interested in understanding more about technical or fundamental analysis, CLICK HERE to help us get in touch with you.
