Remember this before you buy that high-flying penny stock
volatility in the global financial markets.
Apart from this, leap years too have seen a lot of volatility. Statistics show that Indian markets face drawdowns of about 25% every 3.5 to 4 years. 2024 is a leap year and this pattern too adds up to the overall market volatility.
Current Euphoria in the markets is evident through the rapid and exponential surge in the share prices of several penny stocks.
Often these companies either lack transparency, a sustainable business model, or management integrity. These factors are overshadowed in a bull run and every company seems to have good prospects where everyone recommending such penny stock has a convincing story.
As a result, an investor ends up adding many such volatile and risky stocks to his/her portfolio without thinking about the position sizing, liquidity, and its influence on the entire portfolio.
An investor having a reasonable number of stocks with a proper position sizing would generate better results than the broader indices. Still many end up adding several penny stocks to their portfolio in such quantities which in no way influences the magnitude of returns but it increases their risk.
Here’s an example to drive this point. Below is an example of how impactful large concentrated bets can be. If a position with 20% allocation of your portfolio moves by 50% then it will add 10% to your portfolio.
If a position with a 10% allocation of your portfolio moves by 50% then it will add 5% to your portfolio and so on.
On the other hand, if a stock holding 2% in your portfolio moves by 100% then it will add 2% to your portfolio and if a position with a 1% allocation moves by 100% then it will add only 1% to the overall portfolio.
These days investors have been
