Have you heard of Greencrest- the penny stock that rose 1425% this year?

The current rally in the stock markets has seen the price of 132 penny stocks (those having market prices of less than Rs 10 per share) more than double since the start of the current calendar year. Some of them have even given more than 10-fold returns so far in 2014.

Consider this, Greencrest Finance’s share price rose a mindboggling 1,425 percent from Rs 3.75 per share on 31 December, 2013 to Rs 57.20 per share on 1 August, 2014. Likewise, Svaraj Trading’s price surged 1,344 percent from Rs 8.17 to Rs 118 during the same period. Also, shares of ICVL Chemicals rose by 1,091 percent from Rs 2.90 to Rs 34.55. Suchak Trading, meanwhile, jumped 1043 percent from Rs 4.88 to Rs 55.80 in the same period.

Besides these four, the balance 128 stocks posted returns between 100 and 731 percent while benchmark indices, BSE Sensex and NSE Nifty, logged 20 percent returns each. Compared with the benchmark indices, the BSE Midcap Index and BSE Smallcap Index were outperformers as they gained 36 percent and 51 percent, respectively. There were 623 penny stocks at the start of this calendar, of which 493 have turned gainers in 2014 so far while prices of the remaining 130 stocks have tumbled.

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Market analysts, however, were not amused with the phenomenal rise in the share prices of penny stocks and they advised caution while trading in these shares as most of these shares were illiquid. Trading volumes in some of these companies were as low as just one share on some days. According them, low liquidity often drives operators to these counters and as a result, the activity seen in these shares is due to speculation and not backed by fundamentals.

At the start of the calendar year, out of the total 623 penny stocks,296 were illiquid with market cap of less than Rs 10 crore. However, due to a surge in their prices, nearly 63 companies are coming out of the illiquid tag now.

To safeguard the interest of the investors, market regulator Securities and Exchange Board of India (Sebi) issued guidelines for trading in illiquid scrips through periodic call auction mechanism in February last year which was introduced by the exchanges later in April 2013. Stock exchanges identify illiquid stocks at the beginning of every quarter and move such stocks to periodic call auction mechanism.

A scrip, which trades in the normal market and is not shifted to trade-to-trade settlement, shall be classified as illiquid if its average daily turnover is less than Rs 2 lakh for the previous two quarters. The stock is then classified as illiquid at all exchanges where it is traded.

And of the scrips identified as per above criteria, penny stocks that satisfy any of the following conditions are excluded:

i) Stocks with average market capitalisation of more than Rs 10 crore

ii) Where the company has paid dividend in at least two out of last three years

iii) Where the company is profitable in at least two out of last three years, and not more than 20% of promoters shareholding is pledged in the latest quarter and book value is 3 times or more than the face value. Also, the stock has remained in periodic call auction for at least one quarter.

Under the call auction, trading is conducted on an hourly basis, wherein the first 45 minutes are for order entry and modification and the next 15 minutes for order matching and trading confirmation. This is in contrast to the normal market trading, where order-matching and execution take place on a real-time basis during the market hours.

Among penny stocks, not all are small companies as there are well-known companies with market capitalisation of Rs 1,000 crore and more. These include Indiabulls Power (share price up 39 percent), Lanco Infratech (up 21 perpent), GVK Power Infrastructure (up 53 percent), Tata Teleservices (Maharashtra) (up 60 percent), Alok Industries (42 per cent) and HFCL (77 percent).