When you invest in the stock market, you need to be familiar with stock jargon and trading language. This would help simplify your decision-making process. And everything which is costly is also not good. Similar is the case with stocks. When picking stocks, two common terms that you might come across are multi-bagger stocks and penny stocks. These stocks do not belong to a company. They are named so because of their characteristics.
Now the question is what makes a low priced stock a promising penny stock. Or how to select a penny stock that could be future multibagger stocks. These questions are of prime importance then rejecting a stock on the basis of low price. So, Penny stocks or multibagger stocks – Which one should you own?
Let’s understand.
- Multibagger stocks
Multibagger stocks are those that have the potential to yield exponential returns on investments. These stocks give returns of more than 100%, and so they are called multi-bagger stocks. So, if you invest in a stock at Rs 100 and the stock’s value grows to Rs 200 or more, it would be called a multi-bagger stock.
- Penny stocks
Like pennies are very low denominated currencies, penny stocks have a very low market value, usually below Rs 10. Penny stocks usually belong to companies with a small market capitalization and might be listed on a small stock exchange.
While multibagger stocks, by definition, give exponential returns, penny stocks have high growth potential and can also yield exponential returns. As such, these two stocks are often confused with each other.
However, as you can see, they are not the same. Here are some common differences between these two types of stocks:
| Multi-bagger stocks | Penny stocks |
| Mid-cap stocks | Micro-cap stocks |
| Stocks belong to companies in their growth phase | Stocks belong to companies that have just launched themselves on the market |
| Less risky since companies are established on the stock exchange for many years | Highly risky since companies do not have a very strong footing in the stock market |
| Liquid | Illiquid because of low trading volumes |
| Higher probability of exponential returns | Lower probability of exponential returns with very high volatility risks |
Understand the differences between these stock options and then make an informed trading decision.
On the hazardous side, Penny stocks should be invested only if you are ready to lose capital. If you cannot bear so much risk then Penny stocks are not made for you. The More the risk, the more the returns as Penny stocks are riskier than Multibagger Socks they also have the tendency to give returns much more than Multibagger Stocks.
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