Buying Low-Cost Shares: Understanding the Risks and Rewards
For beginners in the stock market, it is crucial to understand the dynamics of investing at various price points. When considering purchasing low-cost shares, it is important to weigh the potential risks against the potential rewards. This guide aims to provide insights into how to approach the purchase of such shares and understand the associated factors.
Introduction and Learning Resources
As a beginner, Investopedia is an excellent resource to learn the basics of the stock market. It offers a wide range of educational materials ranging from fundamentals to advanced topics. You can search for specific topics related to low-cost shares, widely known as penny stocks, to gain a deeper understanding of how they work and the potential outcomes of your investment decisions.
Why Not Invest in Low-Cost Junk Stocks?
While low-cost shares might seem attractive due to their affordability, it is generally advisable to avoid junk stocks. These are often companies with a high risk of being delisted, leading to a complete loss of your investment. Blue-chip stocks, on the other hand, offer a better prospect for long-term growth and returns. The low-priced junk stocks often have poor fundamentals, making it highly unlikely for these shares to provide consistent returns and long-term value.
Where to Find Low-Cost Shares
In India, the Bombay Stock Exchange (BSE) is a popular platform for trading penny stocks. These are shares with low values, also known as low-cost shares. The BSE has a diverse range of such shares, with over 2,000 out of the nearly 5,000 listed shares falling into this category. While these shares are available, it is important to exercise caution and perform thorough research before making any investment decisions.
Potential Returns and Diversification
Despite the risks involved, there have been instances where investors have seen substantial returns from penny stocks. For example, Lupin, a pharmaceutical company, was trading at Rs 1 in 2001 and is now trading at around Rs 1800, reaching a 52-week high of Rs 2200. An investment of 1 Lakh in Lupin back in 2001 would have grown to shares worth 18 Crores, illustrating the potential for significant gains when choosing the right company and timing your investment.
Similarly, Eicher Motors, a well-known automobile manufacturer, has shown remarkable growth. During the early 2000s, the company's shares traded in the low 20s, but today they are trading at around 16,000 per share. These examples highlight the potential for remarkable returns from penny stocks. However, it is crucial to conduct thorough due diligence, including analyzing the company's financials, market performance, and future growth prospects.
Risks and Considerations
While penny stocks present the potential for high returns, they also come with high risks. The success of such investments is highly unpredictable, and the chances of losing money are significant. Therefore, it is essential to diversify your portfolio by investing in multiple companies. By doing so, you can reduce the risk of total loss in the event that one or more of your stocks underperform.
It is also important to note that investing in penny stocks can be seen as a form of gambling rather than a sound investment strategy. If you have a high tolerance for risk and are willing to take a substantial financial gamble, then these stocks might be worth considering. Nevertheless, it is essential to approach such investments with caution, carefully considering the potential outcomes and your overall investment goals.
Conclusion
While the potential for high returns is attractive, investors should be well-informed and prepared for the risks associated with low-cost shares. It is crucial to perform thorough research, diversify your portfolio, and approach such investments with a clear understanding that they can be as high-risk as they are high-reward. Happy trading, but proceed with caution!
Remember, investing in low-cost shares requires a long-term outlook and a high-risk appetite. By understanding these factors, you can make more informed decisions and potentially reap the rewards of such investments.