Investors’ interest in penny stocks rises as valuations of large ones surge

Many illiquid stocks that investors probably wrote off have come back to life in the current market rally.

On the Bombay Stock Exchange, which has over 5,000 listed stocks, the average number of stocks traded in a day was 2,500 last September. Today, it has gone up to 3,300.

Increased action in illiquid scrips has offered many investors, locked into these stocks, an exit option, say market players.

Birla Capital and Financial Services, Abhishek Corporation and Rama Vision are some stocks that hardly saw any trade in September last year. Now, they are quite actively traded. Currently, the turnover in the Birla Capital and Financial Services stock is ₹35,600. Its price is up from 80 paise in September to ₹1.88 now. Abhishek Corporation, which traded for only four days in September, now records a daily turnover of ₹32,700; its stock price is ₹4, up from ₹2.8. On the NSE, the turnover from the top-100 securities accounted for 88 per cent of the turnover last year. This June, it was down to 73 per cent. Clearly, the action is shifting to smaller stocks.

With most liquid and active names in the market already on a high in view of the bull run, investors are looking for stocks that can catch up. Hence, the renewed interest in some of these scrips, neglected earlier.

Shrikant Chouhan, Senior Vice-President and Head of Technical Research at Kotak Securities, says that rising interest from retail investors has brought illiquid stocks back into the limelight. “After the elections, we have seen a good amount of interest and willingness from the retail side of the market to participate in equities. That’s why the number of scrips traded in the market has gone up. And, it appears that interest will only rise, going ahead, as people start chasing relative valuation as large caps have seen significant upmove. Expectations from the Government on small scale sector reforms will keep the interest in smaller stocks active.”

Cash market

That retail investors have been showing renewed interest in the stock market is also evident from the cash market volumes, on both NSE and BSE. In NSE’s cash segment, the daily average turnover in June was ₹20,000 crore, up from ₹12,000 crore in September.

But Rahul Shah, Vice-President- Equity Advisory Group, Motilal Oswal Securities, says, “Penny stocks are risky as a large proportion of the shareholding in such stocks is owned by promoters who are willing to sell them readily. But once you think your stock is performing well and want to liquidate your positions, it is hard to find buyers at that price.”

(This article was published on July 6, 2014)
XThese are links to The Hindu Business Line suggested by Outbrain, which may or may not be relevant to the other content on this page. You can read Outbrain's privacy and cookie policy here.