Penny stocks are low-priced stocks that occupy the bottom rung of the price ladder in the stock market. They are stocks that the market has not found any good basis to price up, so they remain in the price range of around 50kobo – N10 per unit share. They are generally stocks of low-capital companies, which is why they are also called micro-cap or small cap stocks.
Some penny stocks have very low volume, which means that it can be very difficult to buy and sell shares of these stocks. Other penny stocks are very volatile and have huge up and down price swings.
Why Penny Stocks?
Firstly, there is the strong argument of the relative ease of substantial price increase (and decrease too!), possible with penny stocks. Penny stock investors reason that, in a relative sense, it’s easier to achieve massive capital growth in penny stocks. It must be said, though, that losses are equally easy.
Secondly, it is a fact that certain stocks are really at price levels that can be considered out of the reach of small investors. While a tiny 200 units of Company A would require lets say N200 at current price, that same quantity of Company B might take only N160 to acquire. Not a ground-breaking investment, by any chance, but if careful selections are made, a low-income earner could easily set himself on the path to financial growth by picking such affordable investments.
Factors to Consider
The key reservation about penny stocks is their high risk index. Every investment has a risk factor to it, but penny stocks entail a much higher risk. Some of these reasons are:
- Poor Information
Penny stock are usually stocks of small under-reported companies. Some, in the Nigerian context, would be found in the second-tier listing, where regulatory requirements for listing and post-listing reporting are moderated. Some could be relatively new companies without much track record or old companies that have gone off the limelight due to prolonged unimpressive returns or other operational setbacks.
There are blue-chip stocks (stocks of bigger companies) you can be sure of selling when you want, because somebody will be there to pick them. It isn’t usually like this when it comes to penny stocks. You could be stuck with them, at least at the time you want to sell and that could be a major problem. Penny stocks are relatively less liquid.
In conclusion, investing in penny stocks requires careful evaluation to identify truly viable ones.
Penny-stock trading thrives for investors who can’t afford shares of Dangote or Nigerian Brewies, so one needs to be very careful of how you trade penny stocks.