Coming at a time of a virtual halt in economic activity, the rally in these stocks has left market players baffled. Analysts say the new crop of retail investors entering the market could be drawn towards low-denomination stocks.
“There is a tendency among retail investors to conclude that a stock trading at a high price may not run up by much. The base price of penny stocks itself attracts investors, and they rise because of the speculative element,” said G Chokkalingam, founder of Equinomics.
The rally in these stocks is bewildering, given trading in these counters comes with severe restrictions, such as narrow circuit bands, payment of 100 per cent upfront margins, and acute liquidity.
Even in the past three trading sessions, when the market has traded weak, the number of stocks hitting their upper trading limit has outnumbered those hitting their lower circuit, underscoring the strong interest.
“After March 2020, these stocks seem to have played catch-up with a huge portion of their previous underperformance. Further, low floating ones among these stocks encouraged traders to take large positions for making a fast buck,” said Deepak Jasani, head (retail research), HDFC Securities.
The sharp gains have lured more investors into this universe, with over 3 million demat accounts added since March. Even the Securities and Exchange Board of India has taken note of this newfound enthusiasm among retail investors.
At an industry event last week, Chairman Ajay Tyagi had said the manner of increase in retail participation was worrying.
Analysts said many of these were millennials who turned to trade due to lack of returns from other assets, and due to the lockdown-induced stress. “Trading was the only uninterrupted economic activity. Fortunately, most of these new investors made money. However, the beginner’s luck made them overconfident and they are now putting in more funds, which is adding to liquidity,” said Ambareesh Baliga, a market analyst.
He added that gullible investors were being duped by shady operators. Such operators pose as analysts and veteran traders on chat groups, which have mushroomed in the last few months.
New investors, according to market players, rely on actionable tips doled out on open chat groups on Telegram, without much analysis of the company’s fundamentals. “Operators who we thought were dead and buried in the last few years have resurfaced. They pass information in these groups, and stocks they say will rise does go up. As a result, they have a huge following,” said Baliga.
Analysts said this trend of low-denomination stocks running up would not sustain as fundamentals did not back them. “Such bubbles burst in a big way. Ultimately, liquidity in the system is limited. We do not have the depth to allow everyone to encash,” said Chokkalingam.
Analysts said the quarterly results would give a realistic picture of whether this exuberance in the markets
would sustain or not. “We still have several firms that have not announced their results and have taken an extension till August 31. Most of these are delaying the bad news.
It makes sense to delay when investors are lapping up their stocks,” said Baliga.