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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


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?

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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.

Company Name Market cap (Rs cr) No. of retail investors Increase in retail investors (times) Retail investors' 1Y stake increase (% of equity) 1Y returns (%)
Dec-18 Dec-17
8K Miles Software Services 317 35407 14643 2.4 19.1 -85.9
PC Jeweller 2794 204081 29578 6.9 15.3 -78.8
Vakrangee 4622 176177 38065 4.6 11.9 -73.2
VA Tech Wabag 1699 68445 54557 1.3 10.8 -43.6
BSE 2947 160149 141870 1.1 9.8 -29
Housing Development & Infrastructure 1033 253097 231438 1.1 9.6 -54.4
The South Indian Bank 2401 386939 294338 1.3 9.1 -50.2
Emami Realty 355 32968 11394 2.9 8.9 -55.7
Jaiprakash Associates 1484 568943 528610 1.1 8.6 -65.5
Unitech 332 612167 599218 1 8.5 -82
Dewan Housing Finance Corporation 3998 273239 124773 2.2 8.2 -76.7
Manpasand Beverages 844 41186 13517 3.1 7.9 -80.5
Fineotex Chemical 415 37568 18140 2.1 7.7 -43.8
TGV SRACC 303 31820 30105 1.1 7.4 -42.2
Unichem Laboratories 1353 37697 23382 1.6 6.9 -42
Yes Bank 53530 886957 400910 2.2 6.5 -28.2
Thirumalai Chemicals 764 42806 23459 1.8 6.5 -62.6
Sintex Industries 487 289630 297799 1 6.3 -60.4
Reliance Communications 1798 1267247 1239984 1 6.2 -77
Jet Airways (India) 2522 129246 84034 1.5 6.2 -70.2
Infibeam Avenues 2378 82785 12873 6.4 5.9 -77.3
Jain Irrigation Systems 2832 191530 122533 1.6 5.8 -51.2
Central Depository Services (India) 2284 137169 124635 1.1 5.7 -32.2
Aksh Optifibre 307 66382 54004 1.2 5.7 -49.5
Camlin Fine Sciences 541 34312 24160 1.4 5.5 -62.7
Sanwaria Consumer 632 76999 46293 1.7 5.5 -55.2
Dwarikesh Sugar Industries 544 40620 33974 1.2 5.4 -21.1
Reliance Naval and Engineering 701 151479 131913 1.2 5.4 -76.5
Prakash Industries 1470 88384 59555 1.5 5.2 -57
Indiabulls Real Estate 3177 111972 81081 1.4 5.2 -67.2
Data as on February 28, 2019. Minimum market cap is Rs 300 crore.

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