Are Penny Stocks More Profitable?
Dalal Street Investment Journal|March 15, 2021
Many a times it is said that the returns from penny stocks are much higher as compared to large-cap stocks. In this study, we will explore if average returns from low-price stock can generate higher returns for the shareholders. Investors are tempted to invest in penny stocks as they feel that they can buy more number of stocks as compared to when they invest in high-price stocks. Some investors also have this misconception that it is very difficult for the high-price stocks to increase as they have already appreciated.
Are Penny Stocks More Profitable?

Though it is fundamentally incorrect to even compare prices of stocks, and this should never be done, yet in this study, for the purpose of educating investors, we have tried to make a comparison. If companies have to be compared to find if they are relatively cheap or expensive, investors should compare using price earning multiple (PE ratio), EV or EBITDA multiple, price to book multiple (PB ratio) or any other valuation matrix.

We have undertaken this study using data between 2010 and 2021. We selected top 2,000 shares sorted on the basis of market capitalisation and applied two filters:

Market capitalisation should be greater than Rs 100 crore. This filter ensures that we do not include those shares in our dataset which have very small market capitalisation and can be easily manipulated by the traders

Share should have return of equity (ROE) greater than 10 per cent in the year of selection as we assume that shareholders would refrain from investing in shares which do not generate minimum ROE of 10 per cent.

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