Penny stocks: High risk with high returns

Actually putting money or investing in 'penny stocks' is actually not a bad idea, especially when you have a high "tolerance of risk".

As the common saying in equity markets goes "Higher the risk, higher the returns".

Often if you see anyone investing in equity market in unknown companies, you may think that person as a stupid. You may question him/her why he/she wants to take 'risk' by investing in 'small companies' rather than putting money in blue chip companies. Or you may think how can one get returns by investing in such companies.

But, actually putting money or investing in 'penny stocks' is actually not a bad idea, especially when you have a high "tolerance of risk".

What is a penny stock?

In a simple term, a penny stock are the stocks whose share price is as low as a penny.

Generally, it trades outside the major market exchanges at a relatively low price and has a small market capitalization.

According to Investopedia, these stocks are generally considered highly speculative and high risk because of their lack of liquidity, large bid-ask spreads, small capitalization and limited following and disclosure.

But with the highest risk involve, these stocks can give you good returns as well.

While, one of the challenges with investing in penny stocks is finding reliable information about the company. Generally, the analysts or market watchers, cover only well-known companies or company's which have high-priced stocks.

Interestingly, according to a blog named "smart money goal", around 25% of BSE and 10% of NSE are under penny stocks.

But, how penny stocks can make you crorepati? One of the best example can be by looking at Bollywood actor Amitabh Bachchan's investment bucket.

Bachchan managed to make five-fold return from a company called Fineotex Chemical, The Economic Times reported. The purchasing value of these shares were Rs 2.95 crore and later he sold the shares at a value of Rs 14.49 crore, making returns of 392%.

"Various other low-profile companies, which he provides been buying are Mand B Neuland and Switchgears Laboratories", a Wealth Mania report said.

Surprised with his choice of stocks, Wealth Mania quoted a stock analyst, saying, "He should not be investing in penny stocks and these unknown firms. He should not be wasting his money. A person of his stature should invest in blue-chip stocks. A regular trader can experiment with penny stocks. There are several other investment possibilities which Bachchan should explore."

Penny stocks that gave robust returns

Here, we are looking on those companies which are now giving whooping returns in just two years.

According to Money Excel research, the criteria of selecting these shares are:
--The company should be in business for several years.
--The product and services of these stocks must be real and visible.
--Promoter holding in this stock should be reasonable 30-40% minimum.
--The Company should have potential in terms of business and earning profits.

1. Kumar Wire Cloth: In 2014, the share price of this company was just Rs 1.11. Presently, the shares are trading between Rs 32-36, with an approx CAGR of 3143%.

2. Cambrige Technology: In October 2014, the shares of the company were trading at Rs 6.82. Currently, the shares are trading between Rs 128-134.1, with an approx CAGR of 1866%.

3. Virat Crane: The price of the shares two years back was just Rs 9.69. Now, the price of these shares are trading between Rs 50-60, showing an approx CAGR of 540%.