First and foremost, be as sceptical as possible. You have to be doubly careful if the management tries too hard to paint a rosy picture. A good stock never requires an advertisement, at least not by the management. Don’t be a sucker for this sales pitch. Don’t go overboard.

Secondly, focus on those penny stocks with higher volume and a leadership position. Low volumes are a classic buyer’s trap. You see a lot of price damage by the time you sell. Leadership within the segment is a major advantage. It helps a company better leverage a positive business climate. Watch out for them.

Don’t be too long or too heavy on penny stocks. Obviously, penny stocks cannot be 25% of your portfolio. You are surely asking for trouble. I know of investors who fall in love with penny stocks and hold on to eternity. Just because a penny stock has a good story, does not mean you bet your bottom dollar on it. Keep a mental time frame for the penny stock story to play out. Otherwise, forget it.

Remember one of the golden rules of penny stocks. This is a rule I have often emphasized. If something is too good to be true, then it is probably not true. If you get into a penny stock and it appreciates 100% in a month, just exit without thinking twice. You may miss a multi-bagger, but you exit profitably. You are better safe than sorry.

The basic rule of penny stocks is to buy slowly and exit hastily. If you want to allocate Rs.100,000 to a few penny stocks, don’t do it all in one shot. Phase out your buying to reduce costs. But when it comes to selling out, don’t wait for too long. They moment you are getting a good price, just exit. Such stocks are notorious in the sense that they can suddenly become very illiquid.

Avoid the cardinal blunder of short selling a penny stock. Most penny stocks may not be available in the F&O segment. Hence shorting intraday may be the only option. This is fraught with risks as such penny stocks are prone to violent movements and auction risks. And leveraged positions can truly damage. Of course you cannot short T2T stocks but even normal stocks in the penny stock space can be outrageously funny in their behaviour.