Low-Priced Stocks: A Roulette That May Well Be A Losing Bet

Many have weak fundamentals to back share price rise and may not live to see the next bull run

- Sundar Sethuraman

Stocks trading at a low price denomination have risen sharply, largely due to speculator interest or new investors trading actively during the pandemic.

The S&P BSE Sensex has gained 135 per cent from the lows it hit on March 23, 2020. And 666 of the 833 stocks trading at +20 or below in March 2020 have outperformed the index. Even from a one-year perspective, 657 of these stocks have outperformed the Sensex in 2021.

In fact, some of these stocks have seen gains between 50x and 80x in less than two years.

Of the 508 stocks trading at $10 or below (popularly known as penny stocks) during March 2020, 438 have outperformed the Sensex. And 401 outperformed the index last year as well. The rally in these stocks when the economy faced bouts of disruptions due to Covid19 has baffled analysts.

Experts say there is a tendency among retail investors to conclude that a stock trading at a high price may not gain much, and a stock trading at a low price is cheap'.

In the case of the latter, the low price of stocks itself attracts investors, and they rise on speculation. The sharp gains encourage traders and speculators to take large positions for making a quick buck.