Penny stocks have a low price per share value that falls within the price range of N5 and below, which means investors do not need a ton of cash to invest in them. They are also often capable of providing massive returns to investors, and this is what makes them attractive.
Also, penny stocks are quite prone to massive drawdowns due to their high volatility and can be viewed as a blend of high risk and strong profit instruments. Consequently, some stock analysts discourage purchasing them for long-term buy-and-hold investments, as the sector is often built on short-term trades. It is therefore, critical for investors to know when to take profit as these stocks often offer cyclic returns.
The founder of Tradelines DotBiz Investment Limited, Mr Tunde Jeariogbe, says “The phrase ‘Penny Stock’ was coined out of the American unit of currency, it refers to equities selling below one dollar. Since penny is a lower denomination, it therefore signifies that equities in this class are low priced stock or small companies.”
Advantages of Patronising Penny Stocks
Jeariogbe says the first advantage is that traders can purchase high volume of such stocks due to the low price, and increase their returns at very little change in the share price.
Secondly, he notes that the probability of recording high loss is lowered, since most of them are already at rock bottom, especially in a controlled market as we have in Nigeria. Recall that price movement is set at every day’s trade and traders cannot even move a stock below a particular price.
Tips for Choosing Best Penny Stocks
“Now, what are the things to watch out for in penny stocks? The first is the numbers released by the companies. You must be sure that the stock is not down for extremely poor performance. Secondly, you must ensure the liquidity of such stock; in other words, ensure that when you decide to exit the stock, someone will be willing to take it from you. Lastly, identify the management strength, is the organisation efficiently being run?” He notes.