That’s because penny shares tend to represent small companies that have fewer regulations and reporting requirements. And if anything, they require an extra layer of scrutiny before you invest in them rather than other shares. Penny stocks are not a get rich quick scheme. Likewise, with penny stocks, you might be getting what you paid for: nothing all too good. Just because one share is cheaper than others doesn’t mean it has a better opportunity for growth.Ī meal deal is great and all, but if the chicken salad’s gone off, it won’t make for a great lunch. It’s important to remember that price does not equate to value. In this guide, we’ll run through how to identify good value when investing in penny stocks so you can decide whether these stocks are right for you or not. Key to that is avoiding getting sucked into what looks like a deal but is actually just a dud hiding behind a cheap price. There are still penny stocks to buy that can offer good value for an investor. It doesn’t help that many of the penny shares UK investors buy are often treated like racehorses at a bookies’ office.īut, as tends to be the case with stereotypes, the idea that all penny stocks and shares are for speculative punts or Wolf of Wall Street scammers isn’t true. They may be cheap but they’re often volatile, which makes it especially hard to predict what their price is going to do. In FY19, Sebi booked over 10,000 individuals for trading in illiquid stock options–another scheme used for tax evasion.ĭon’t miss out on ET Prime stories! Get your daily dose of business updates on WhatsApp.Penny stocks don’t have the best reputation. However, in 2018, the government removed this exemption. The cases also involved the misuse of the long-term capital gains (LTCG) tax exemption available for listed companies. In 2015, an extensive probe was conducted by both the regulators on stock exchange platforms being used for booking artificial losses and in turn escaping higher tax outgo. Sebi and the tax department have joined hands to clamp down on the use of stock market platforms for illicit purposes such as money laundering or tax evasion. “The broker has returned the customer’s funds to him, with the added benefit that it’s a legitimate capital gain after paying the capital gain tax.” The broker then buys back the shares from the clients at 4-5x and takes cash for his losses,” said Arun Kejriwal, founder of KRIS Research & Advisory. “Brokers sell certain stocks to clients at x price and manipulate it by circular trading to a 4-5x. Some market participants said that many penny stocks are used to convert black money into white. Stocks such as Mercury Metals, S&T Corp, Karnavati Finance, K&R Rail Engineering, Taylormade Renew, Ascom Leasing, and Regency Ceramics, among others, have rallied over 1,000% since the beginning of the current fiscal year. "Retail investors should always remain cautious while investing in such stocks as they might get trapped and lose their hard-earned money." "Many of these companies could be shell companies or companies having little business, but their valuation is beyond par," said Narendra Solanki, head of equity research, Anand Rathi Shares & Stockbrokers. The volumes appear to have been contributed by a large number of retail investors likely influenced by the misleading YouTube videos, it said.
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