June 19, 2019

By Raphael Afam

Penny Stocks – Are you a prospective or intending investor, are you excited knowing you can make a lot of money trading stocks in Nigeria, but you are probably afraid of getting your fingers burnt in the Capital market.

If the above ticked the right boxes for you, I hereby encourage you to sit back and read this article to the final paragraph, because what I’m about to reveal to you here and now is savvy information you’ll ordinarily be charged to access.

Additionally, I feel so safe to tell you that you’re about to unlock a floodgate of financial prosperity in your life. If your finance is anything of great concern to you, then read this post as if no other opportunity will ever come your way again. 

Understanding the concept Penny Stocks

Penny stocks are shares as popularly called, or equities which have relatively low prices, as well being traded at the Capital Market. Considering the nature of this topic, I will make it explanatory and analytic.

This type of stock is ideal and mostly preferred by investors on small and moderate budgets, who do not want to blow up with Capitalized stocks.

The idea behind this type of stock is that, with little amount you are sure of owning larger units of shares conveniently than you will do investing in Big caps.

Let’s say company XYZ quoted, sells its stock at fifty kobo (N0.50k) per unit, provisionally you have N20,000 you’d want to invest in the market.

It then stands that N20k can afford you 40k units of XYZ company shares, better still N20k will avail you part ownership of the company XYZ.

Investment in equity is a game of number, assuming the company declares bonus shares of say two for four, it then means that for every four units of shares you have in your forty thousand unit portfolio, you will receive extra two units free of charge.

Mathematically 40000/4 X 2 = 20,000 units

From the above illustration, it then stands that company XYZ will award you extra 20,000 units of shares on your existing portfolio of 40,000 units.

You now have 40,000 + 20,000 = 60,000 units of shares in your investment portfolio.

Assuming after six months of this purchase, the price appreciates to N1.20k

Your investment value then becomes 60,000 X N1.20 = N72,000.

Recall, your initial investment was just N20,000.

Your profit should then be N72,000 – N20,000 = N52,000. Just within the interval of six months.

You now tell me which bank fix deposit rate will give you N52,000 on an investment value of N20,000 in six months, I feel so safe to tell you that there’s no such bank, why then leave your money in the bank. 

Penny Stocks vs Capitalized Stocks

You may be wondering why I lay much emphasis on penny stock than capitalized stock itself, not to say that penny stock does not have its downside, sure it does, order wise it seizes from being an investment.

But pictorially, we’re looking at capacity and investment power which boils around money.

Assuming company ABC quoted sells its shares at N30 per unit of share.

It then infers that to buy 40,000 units of shares you will require

40,000 X N30,000 = N1,200,000.

Of which investors with small and moderate investment power may not afford such money.

Again, it’s very difficult for a share priced at N30 per unit of share to appreciate to about N40 within six months, although, could be obtainable at rear occasions, as such would be a long term investment and required capital financing. 

My Point 

Penny Stocks give you the opportunity to be an active player in the Nigerian stock market against the aged long popular believe that the market is strictly for those with huge investment power/ability. 

Why you should invest in Penny Stocks

• The price at which they are sold and purchased is very low and affordable to every intending investor, thereby bridging the gap between the affluence and low income earners who now can now secure their future as well.
• There’s high tendency for great returns on investment, having seen my illustration, I expect you to understand without further doubt that it’s a win win situation.
• It’s ideal for a short term investment, I will advise you to trade within 1 – 6 months at most, that’s why it’s termed trading, watch the price, the moment it appreciates, dispose it and look for another stock with good prospect.

How to invest in Penny Stocks

Investing in Penny stock does not in any way involve a rocket science, it’s same as investing in Big cap.

However, there are directives and dynamics which you are expected to follow for smooth and seamless investment experience.

You can start your investment by following the below listed guidelines:

• You will have to visit a stockbroker in Nigeria, then open a CSCS account. This stands for Central Security Clearing System, it’s through this CSCS account that your broker will be able to buy penny stock according your instructions. You’re expected to fund your account readily, this is to enable you give instructions at any time pertaining any stock you would like to buy. You will be assigned an account number, which will link every stock trade and keep records of all your holdings.

Requirements for opening a Brokerage account

• You will have to make available your two passport photographs to the Broker
• A utility bill not older than 90 days
• Then a credit balance.
• A completed CSCS account opening form

Note: It’s always advisable to heed advice from your broker as to what penny stock to buy, you are however at full liberty to make your independent choice, but a professional stands a good chance to advice on certain stocks at certain times.

There are technical and fundamental stock analysis you may not be aware of as a newbie, this is why your broker should advice you right on the choice of investment, to avoid getting your fingers burnt.

However, before you finally settle for Penny stock broker, kindly shop around and compare charges of these brokers considering the following parameters

• Transaction charges
• Minimum Brokerage per share
• Minimum Brokerage per order charges
• Trading frequency
• Brokerage account maintenance charge and
• Withdrawal charges, some brokers will charge out of this world, milking your profits with reckless abandon.

How to find best Penny Stocks for your investment in Nigeria 

Having the enthusiasm to trade penny stock is not enough to guarantee your success, Penny stock doesn’t guarantee you a risk free adventure, being that you probably decide to stay away from Big Caps.

You can learn trading penny stock in the following ways:

• Follow market trends, if you’re actually interested in learning this trade, you should devote your time to studying how these stocks behaves in the market over time. Watch performing and non performing stocks.

• Learn the technical and fundamental analysis of how stock trading works, you can do this by getting closer to your brokers, or better still join a stock trading class, there are credible classes that will put you in perspective , you search them out.

• If you want to buy a stock of a particular company, and you gather insider information about the said stock, it happens that the employee themselves are not buying their stock, it’s a red flag. Something is wrong and you should stay away. If they are buying aggressively, chances are it’s a good deal.

• If you can interpret financial statement of a firm, it’s a plus and will sure help you in decision making when investing. A healthy balance sheet will mostly probably affect a stock positively.

Sources of information for making investment decisions

The quality of information you have determines the accuracy of investment decision you make.

There are many reliable sources through which you can gather information on daily basis for your investment analysis, these include:

1 ) Business columns of daily newspapers: In these columns, the financial editors of several newspapers analyze the performance of companies.

2 ) Business papers and magazines: These type of papers concentrate mainly on business news

3 ) Insider Information: You get authentic information on what a company is doing for better performance through its staff, distributors, contractors and any person who has access to the organization.

It’s important that you as an investor should know if the insiders are selling or buying their stocks, especially the management staff of the company because they influence the direction of the company. If they are buying large quantity of their stock, it therefore means they are sure of where they are going.

4 ) Annual general meeting proceedings and reports: Company performance and future plans are usually discussed during the AGM. Investors use the information to either invest or pull out of the company.

5 ) Quarterly reports: Every quoted company is expected by law to make public her performance at the end of every quarter, this is usually a unique and valid source of information for investment decisions, particularly for short term players in the market.

6 ) End of the year report: This shows how a company performed at the end of each financial year.

7 ) Books and manuals: You can buy several books in the market which have some investment tips that can guide one to make investment decisions.

8 ) The internet: You can visit sites that are rich in investment information for your penny stocks.

9 ) Audit and accounting firm: These firms have good knowledge of the performance of an organization particularly those clients that fall within their belts and supervision. There information is very reliable.

10 ) Conference and seminars: Investment awareness is on the increase through experts who run investment seminars and conferences. Attend such to be current in the happenings in the capital market.

11 ) Prospectus: The company prospectus gives an insight into its past performance.

12 ) Through the Nigerian stock exchange publications: Monthly stock market review, weekly stock market report and the Nigerian stock exchange fact books.

13 ) Earning report: Earning move stocks rapidly, it directs the investors where to go.

14) Central Bank of Nigeria: Useful information can be obtained through financial regulatory bodies like CBN, Security and Exchange Commission (SEC), Chattered Institute of stock brokers etc

15 ) Stock broking firms and financial institutions: They have information for investment decisions.

Conclusion

Investing in penny stocks does not in any way imply that it’s void of any form of investment risk. But it has the potential to increase your profit over a shortest period of time. Besides the investment amount is moderately low, likewise the risk involved.

Thank you very much for your audience.

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Email: raphdon515@gmail.com