Low price denomination stocks dominate investor interest, shows data

Stocks quoting a low price denomination have caught investors’ fancy, defying economic indicators. Of the 854 stocks that quoted less than Rs 20 on March 23, 2020 — when the Sensex hit more than a three-year low — 482 have doubled.

Thirty-nine, including Subex, McLeod Russel, Jet Airways, Jain Irrigation Systems, and Sintex Plastics Technology, have surged more than 5x during this period.

Coming at a time when economic activity was disrupted due to the Covid-19 pandemic, the rally in these stocks has left market players baffled. According to analysts, a new crop of retail investors entering the market could be drawn towards low-denomination stocks.

“Let’s look at the composition of the market. Foreign portfolio investors who are big buyers won’t touch these stocks. And domestic institutions are selling. The major buyers of these are retail investors, especially ones who came to the market after March,” said Ambareesh Baliga, an independent market analyst.

Analysts said 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 on speculation. After March 2020, many of these stocks seem to have played catch-up with the rest of the market. Further, low floating ones among these stocks encouraged traders to take large positions for making a quick buck.

The sharp gains have lured more investors into this universe, with millions of demat accounts added since March last year.  Many of these investors, according to analysts, were millennials who turned to trade due to lack of returns from other assets, and due to lockdown-induced restiveness. However, analysts warned that the beginner’s luck could make them overoptimistic.

“Most haven’t studied the company fundamentals or considered valuations. They buy based on uninformed advice. Since the stocks are on the rise, their confidence levels, too, have gone up,” said Baliga.

Some market players allege that gullible investors are being duped by shady operators masquerading as analysts and veteran traders on chat groups. “These operators were nowhere on the scene in the past few years. This boom has allowed them to reemerge. In some companies, a cartel of promoters and operators are driving the prices,” said Baliga.

Market players warned new investors to not fall prey to tips parcelled out on open chat groups on Telegram and WhatsApp, without much analysis of the company’s fundamentals, and said this trend of low-denomination stocks running up would not sustain.

“When the markets correct, people will either lose money or will have to wait till the next boom. The toughest thing to do in today’s market is to sell and sit on cash. Somewhere people will get stuck, and it’s a good time to book profits,” said Baliga.

Siddhartha Khemka, head of research (retail), Motilal Oswal Financial Services, said these stocks could fall even more sharply when the markets correct. “Investors should study the fundamentals of the company and its business prospects before investing. It’s not as if all companies in this universe are bad.”