Hindusthan National Glass, down a whopping 67% so far in 2022.
Ballarpur Industries, so far a huge 65% decline in 2022.
Birla Precision, down 53% so far in 2022.
Sintex Industries, down 52% so far in 2022.
Indowind Energy, down 49% in 2022 so far.
The list continues…
Of the 1,950 penny shares (shares trading below Rs 100) actively trading on January 1, 2022, 1,163 of them have generated negative returns in 2022 so far.
A few hundred of them are trading more or less at the same level as at the beginning of this year.
And there are a few, 62 to be exact, that have generated multibagger returns from 100% to 872%.
These results emerged when we asked a question about how penny stocks are performing this year. By the way, you can check out the top-performing penny stocks of 2022 here.
Well, as the losses show, investing in penny stocks isn’t a dream come true. The euphoria surrounding penny stocks among aspiring retail investors in India is getting crazier by the day.
How many times have you seen a stock rise more than 800% in a span of just 2 months! Or a stock that completely wipes out your assets in the same period?
If you invested in penny stocks in 2022, you know by now that it is a challenging mix. You’ve probably seen how volatile the stock market is.
If blue chip stocks like HDFC and HDFC Bank are also falling, you know this is a warning sign and an indication that we are in for a volatile ride.
So during volatile periods like the one we’re in right now, it’s important to be very selective when it comes to penny stocks. One should have penny stocks that pay dividends regularly so that the downside is mitigated.
Penny stocks with strong payouts and strong balance sheets usually survive a crash better than other stocks.
We’re not just saying this out of arbitrary assumptions. The numbers support the data.
After the bull market between 2014 and 2017, the following years proved to be unforgiving for mid- and small-caps, the segments where most penny stocks come from.
First, the small cap index fell 23% in 2018. After that, the index fell another 34% over the next 15 months. This resulted in a massive 50% top to bottom meltdown. Ouch!
Strong gains from the bull market from 2014 to 2017 were completely wiped out in this crash. It was stock market carnage at its worst.
In the 2018 period, penny stocks with the highest median payouts in the past five years fared in line with the BSE small cap index. A few of them fell more, but the numbers were higher for the stocks that outperformed the small-cap index.
Some also ended positively. Indian Energy Exchange (IEX), Goldiam International, Firstsource Solutions, Generic Engineering, Birla Cable and the like, which were profitable and paid regular dividends.
Also in the next 15 months, when the small cap index fell by 34% between January 2019 and March 2020, stocks with dividend payments and strong balance sheets performed well.
Of course there were a few who fell more. Such as PC Jeweler, Jaiprakash Associates, Jain Irrigation and the like, which were already under scrutiny. And the late March 2020 crash hit even quality stocks.
The point we’re trying to make here is that it’s important to stick with penny stocks that pay regular dividends, during volatile periods. They usually survive a crash better than other stocks.
Here’s a list of penny stocks that pay regular dividends, have made gains in the past three years, and have a debt-to-equity ratio of less than 1.
The inventories listed in the tables above are not recommendations.
What about the allocation?
Now what after you’ve selected the best penny stocks to buy in 2022?
You can get the most out of penny stocks by spending your capital efficiently. That is, moving the allocation between penny stocks and fixed deposits.
Since we are dealing with penny stocks, it is always important to keep some money off the table.
So instead of parking your total capital in penny stocks all at once, you periodically divide small equal parts over a longer period of time.
Don’t make the mistake of charging penny stocks at any stage of the market price cycle.
For example, let’s say you have Rs 100. Start by allocating Rs 25 each to penny shares and fixed deposits from the corpus of Rs 100. Keep at least 25% in both assets and never go 100% in both.
Then allocate the remaining Rs 50 based on how closer you think we are to the top or bottom of the market cycle. If you think the markets are expensive then allocate the remaining Rs 50 in full to fixed deposits or re-allocate Rs 25 to both asset classes.
The beauty of this approach is that you are always in crash protection mode as you are never 100% invested in penny stocks.
Interesting, isn’t it?
Investors who have money on the sidelines can use the market correction as an opportunity to allocate more.
Don’t panic amid the volatility and stick to a process.
When investing in penny stocks, it is very important to distinguish between penny stocks that are investment-worthy and those that are highly speculative.
Brace yourself for a bumpy ride into 2022, as inflation bells still ring and geopolitical tensions between Russia and Ukraine seem far from over.
With a clear strategy on your side, your journey can turn out relatively more comfortable.
Have fun investing in Penny Stock!
Disclaimer: This article is for informational purposes only. It is not a stock recommendation and should not be treated as such.
This article is from Equitymaster.com
(This story was not edited by DailyExpertNews staff and was generated automatically from a syndicated feed.)