How Penny Stocks Work and Why They Attract Retail Investors

In the Indian stock market, penny stocks got the attention of retail investors. Especially the retail traders who are looking for opportunities with limited capital. Therefore, these stocks come with unique prospects and hidden risks. At The Trade Bond, we believe that understanding how penny stocks work is important before adding them to your portfolio. Here, in this blog, you will learn about what penny stocks are, their long-term potential, and why they have become popular among retail investors.

Generally, penny stocks are low-valued shares that trade below Rs. 10 or Rs. 20 in India. Companies with small market capital and limited liquidity release these low-value shares. Investors are attracted to these because small price movements can result in noticeable gains. However, many of these businesses that operate in niche industries can have equal risks.

At The Trade Bond, we encourage traders to approach penny stocks with in-depth research. Also, by keeping in mind their fundamentals, sector performance, and long-term growth.

Before you invest in penny stocks, it is important to know the difference between penny stocks and small-cap stocks.

Penny stocks:

These are the low-value shares of the micro-cap companies with limited market capital. Due to the small trading volumes, prices always fluctuate.

Small-cap stocks:

Comparing to penny stocks, these companies have higher market capitalisation. Generally, these are more established and also have good liquidity. These are more volatile than large-cap companies.

Here, you have to understand that not all small-cap stocks are penny stocks. But many penny stocks come under the small-cap category. Because small-cap companies may still be volatile, but they have a strong business structure compared to penny stocks.

Usually, some penny stocks show a possibility for long-term investment that is backed by fundamentals. To find such opportunities, investors should look for:

Financial statements:

Here, you can understand the company’s revenue growth and debt levels by reading financial statements.

Business model:

You have to know about the companies with scalable operations and market niches.

Promoter holding:

Usually, higher promoter confidence shows long-term commitment.

Sector outlook:

Look for industries like renewable energy, IT, or the pharma sectors with future demand.

You can explore our dedicated page on long-term stocks for valuable insights. We explain how to build a strong portfolio over short-term market moves.

There are many reasons why retail investors are attracted to penny stocks. Below are a few reasons you will learn now:

Low entry cost:

Because of low prices, investors can buy a large amount of shares with minimum capital.

High returns:

Even small price movements can give a large amount of gains.

Psychological appeal:

Holding a large number of shares gives investors a sense of ownership.

At The Trade Bond, we observe new traders entering the market through penny stocks due to their low prices. Although we encourage our readers to gain knowledge through market education. That’s why we help you with our services like short-term trading tips. And get guidance from our SEBI-registered stock market advisor.

Therefore, some penny stocks have the potential to turn into multibagger penny stocks when they are backed by strong fundamentals. Companies that are operating in industries that are in demand and gaining interest from big investors can stand out. With the help of transparent management practices, identify long-term penny stocks. So, investors can find the right opportunities by studying these signs. To explore this in detail, read our blog on how to identify multibagger stocks early. We explain the key points about multibagger stocks.

Here, you will understand the advantages and disadvantages. Because penny stocks come with both opportunities and challenges:

Advantages:

1. Need lower investments.
2. Scope for high returns over time.
3. Opportunity to participate in early-stage companies.

Disadvantages:

1. Have high volatility and limited liquidity.
2. Limited financial disclosures in some cases.
3. Have a higher risk because of underperforming companies.

At The Trade Bond, we suggest balancing penny stocks with other equity categories. Therefore, by ensuring the portfolio will not completely depend on high-risk investments. Getting guidance from a SEBI-registered investment advisor can help to build balance in your portfolio.

While penny stocks should be carefully analyzed before investing, below are some categories of companies that are getting attention in 2025:

Renewable energy:

Small firms that are entering the solar and wind energy space.

IT services and fintech:

In this sector, growing businesses offer niche digital solutions.

Infrastructure and construction:

Companies that are getting benefited from government spending on urban growth.

Investors need to look for penny stocks to buy today, or they should track multibagger penny stocks for 2025. So, you should focus on companies with strong fundamentals. A list of penny stocks in India can be a starting point, but research and patience are very important.

Due to their low prices and growth potential, retail investors are regularly attracted to penny stocks. But they also demand careful analysis and disciplined investing. At The Trade Bond, we recommend to align penny stock strategies with goals. Combining them with stable investments with good trading practices gives good results.

As we move further into 2025, investors who focus on fundamentals and are looking for professional guidance have a chance to find the best penny stocks for long-term growth. Whether you’re building a strong portfolio or looking for these stocks with good fundamentals. Hence, make sure that your approach is combined with knowledge, patience, and proper strategy.

How do penny stocks impact a beginner’s trading journey?

Penny stocks can give beginners exposure to the market due to low prices. But due to high volatility, they should start with a small to build portfolio.

What are the risks of liquidity in penny stock trading?

Due to low liquidity, it makes it harder to buy or sell these stocks quickly. These can trap investors during sudden market fluctuations.

Can penny stocks be traded daily?

Yes, but liquidity is very low. Daily trading in penny stocks can be very difficult, so many investors prefer holding them gives long-term growth.