Avoid penny stocks, buy expensive ones

Many traders and investors likes to buy shares priced below rupees 10. They think these penny stocks double in their value. But this not correct. Share priced below Rs.10 are known as penny stocks.

Traders always attracted towards penny stocks and small cap stocks. Since the market cap is low, they are easily manipulated by operators who lure unsuspecting investors and dump worthless shares on them. They first create a buzz around a stock, indulge in circular trading to push up the price, and then nudge investors to buy at high prices.

Look at the shares priced above rupees ten thousand. When you see these stock price you will think “ Oh ! its heavily priced and it is very very difficult to go further up” . But this assumption is wrong. We have many examples.

‘Expensive’ stock more than doubled in last one year

If you are an investor chasing penny stocks and not considering expensive stocks, then you are making a deadly mistake. Consider MRF share. Last year March share price was around Rs. 20,000. Now in 2015 March share is running at 40,000. That is almost doubled.
Look at another stock Eicher motors. Last year price was only 5000. Now Eicher motor share trading at 16,000. Tripled the investment !. There are many stories like this.

One common thing amongst these names is the consistent improvement in their return ratios. Although highly priced, investors should keep these stocks in their radar. There are other advantages in owning such high-priced stocks.

All these stocks are far less volatile as the shareholding is concentrated among a few investors, mainly long-term institutional investors, making it difficult to m a n i p u l a t e these stocks.

Also, beta — a measure of volatility — is less than one for all these stock . Companies such as Page Industries, Bosch, MRF are industry leaders. By not splitting the stocks, these companies cap their equity. Companies such as Page Industries, Bosch, MRF are industry leaders. Having a limited equity helps them to always command a premium and keep their valuations high. Most investors in these companies are mainly institutions.