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A tempting way to lose money

Retail investors tend to get attracted to low-price stocks. But betting on them could result in high losses

A tempting way to lose money

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The buying price of a stock definitely plays a role in determining your returns. But a 'low price' itself should not be your only selection criterion. If a stock is priced at Rs 5, would you buy it? As most stock investors know, the stock price alone conveys little. One has to assess the valuations and the potential of the business before buying a stock. A very low stock price actually means something wrong with the company. Otherwise, why would a sound company trade at ultra-low prices?

But data suggest that retail investors find a low price irresistible. Unlike institutions which bet on quality or growth prospects of a company, retail investors tend to bet on junk stocks, looking at their low prices. Such decisions are often driven by greed rather than logic. For some reason, retail investors believe that a Rs 5 stock can quickly become a Rs 10 stock. And with a small amount, they can buy a lot of Rs 5 stock!

Many times a low-price stock is like a falling knife. Retail investors tend to think that because a stock has already fallen a lot, its downside is limited. Often such stocks keep falling and investors end up loosing their hard-earned money.

Take for instance 8K Miles Software. This stock fell from a high of Rs 850, hovered around Rs 300 for around a month and fell to Rs 60 in the next three months. An investor who would have invested in the stock when it was around Rs 300 would now be sitting at a loss of more than 65 per cent.

The table below lists companies where retail investors have increased their stake by more than 5 per cent and it comes as no surprise that their stock prices have corrected in the range of 20-86 per cent over the last one year. Many of these companies are going through serious corporate-governance issues or business downturn or they have highly leveraged balance sheets. Investors should avoid them.

No. of retail investors
Company NameMarket cap (Rs cr)01/12/201801/12/2017Increase in retail investors (times)Retail investors' 1Y stake increase (% of equity)1Y returns (%)
8K Miles Software Services31735407146432.419.1-85.9
PC Jeweller2794204081295786.915.3-78.8
Vakrangee4622176177380654.611.9-73.2
VA Tech Wabag169968445545571.310.8-43.6
BSE29471601491418701.19.8-29
Housing Development & Infrastructure10332530972314381.19.6-54.4
The South Indian Bank24013869392943381.39.1-50.2
Emami Realty35532968113942.98.9-55.7
Jaiprakash Associates14845689435286101.18.6-65.5
Unitech33261216759921818.5-82
Dewan Housing Finance Corporation39982732391247732.28.2-76.7
Manpasand Beverages84441186135173.17.9-80.5
Fineotex Chemical41537568181402.17.7-43.8
TGV SRACC 30331820301051.17.4-42.2
Unichem Laboratories135337697233821.66.9-42
Yes Bank535308869574009102.26.5-28.2
Thirumalai Chemicals76442806234591.86.5-62.6
Sintex Industries48728963029779916.3-60.4
Reliance Communications17981267247123998416.2-77
Jet Airways (India)2522129246840341.56.2-70.2
Infibeam Avenues237882785128736.45.9-77.3
Jain Irrigation Systems28321915301225331.65.8-51.2
Central Depository Services (India)22841371691246351.15.7-32.2
Aksh Optifibre30766382540041.25.7-49.5
Camlin Fine Sciences54134312241601.45.5-62.7
Sanwaria Consumer63276999462931.75.5-55.2
Dwarikesh Sugar Industries54440620339741.25.4-21.1
Reliance Naval and Engineering7011514791319131.25.4-76.5
Prakash Industries147088384595551.55.2-57
Indiabulls Real Estate3177111972810811.45.2-67.2
Data as on February 28, 2019. Minimum market cap is Rs 300 crore.