Liquidity Glut Sends Penny Stocks Through the Roof

Prices of around 100 stocks soar 30-90% over past 16 sessions, post global & local stimulus plans     Retail investors don't necessarily learn the hard way if the recent spurt in penny stock counters is anything to go by. The prices of around 100 stocks, with a market cap of less than . 300 crore, have jumped 30-90% over the past 16 sessions, which has coincided with an improvement in market sentiment following global stimulus measures by the European Central Bank and the US Federal Reserve along with reforms back home.  The price spurt comes despite most of these stocks having circuit filters of 5%, which limits their daily price move. Market analysts caution that limited supply of such stocks makes them an easy target for manipulators who can dump them when retail investors start buying.  "The nature of penny stocks is such that even if retail investors manage to make money in a few, they invariably lose money in the final reckoning as these stocks are easy targets for manipulators," said G Chokkalingam, CIO, Centrum Wealth Management.  The top penny stocks that have dominated active counters with a whopping return of over 80% so far this month include Nikki Global Finance, Nardhana Infrastructure, Gujarat Carbon, Jagson Airlines, Arcuttipore Tea, Vora Constructions and Unno Industries among others. Most small investors lost money during the market turmoil in the 2008, when the Sensex fell over 52% and BSE small-cap crashed over 72%. Due to the sharp fall, lack of direction and fear, small investors sold their stocks heavily. Now they are buying similar stocks in the hope of making good their past losses.  "Retail investor interest in equity markets has gone up over the past few days. However, we advise them to invest only in companies with good corporate governance and sound fundamentals, while avoiding penny stocks," said Anand Rathi, chairman, AnandRathi.  In many counters, volumes have picked up drastically since the beginning of this month. For instance, Arcuttipore Tea, with a daily average volume of 3,000 shares during June-August, has seen average volumes of more than 65,000 so far this month and 1.17 lakh last Friday.  Another counter, Divine Multimedia, which gained 62% this month, saw an almost 10-fold increase in average volumes to 2.23 lakh shares in the past 10 trading session compared with 25,000 shares earlier.  Similarly, counters such as Gujarat Capital Ventures, Sybli Inds and Nivyah Infra have seen huge volumes and price increases in the past few days. This clearly indicates that while FIIs are chasing quality stocks in Indian equities, retail investors are betting on small-cap stocks in anticipation of quicker gains.  The strategy of investing in smallcaps may pay off as long as the party continues on Dalal Street. As stocks change hands from one investor to another, prices rise due to controlled supply. However, those who are left with the mid-caps at the end of the chain may suffer huge losses.