Dealing in Penny Stocks - Win Big or Go Home Empty


Sunday, August 15, 2021 / 08:00PM / Market Pulse by Comercio Partners / Header Image Credit: IG

The equities market has been loosely described by many as a casino ground for the more sophisticated speculators, you buy low and you sell high, in the same manner that many deal in commodities and cryptocurrencies. Although a non-holistic description, you could find some reasons as to why people will make this categorization of the market, after all, we have witnessed several occasions where the market seemed to act like a self-fulfilling prophecy - people are buying because prices are rising, while prices are ticking up because people are buying. However, this is seldom true, as movements are mostly caused by tiny or large facets of information.

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The very small tickers

On the local bourse, penny stocks seem to give strength to the speculation narrative, given the frequent huge swings taken to the upside or downside, without sufficient information to support such movements. This year, speculators have created much volatility around penny stocks that are priced at N5 per share or less, with many topping the gainers and losers list. While you cannot overrule the possibility of some underpinning fundamental changes driving some level of bargain hunting around these cheap stocks, the magnitude of the price movements points more to speculative interests.


Hence, if you are approaching the equity market with hopes of making casino level gains (with a high possibility of losing money also), investing in fundamentally viable large tickers like MTNN, DANGCEM and NESTLE wouldn't be a priority for you. Rather, you would want to consider the risky but potentially rewarding path of speculatively investing in penny stocks, which offers a glimmer of hope to your money doubling desires. However, the downside risk to this equity investing strategy is nested in the risk return paradigm. Just like gambling, you could lose big. Price movements in Japaul Gold & Ventures PLC exemplify this penny stock narrative, as news of the company restructuring from an oil servicing company to a new business of mining natural resources caused the price to skyrocket by 210% last year. This was an overcompensation, given that the market lacked adequate information about the proposed restructuring. On the flip side, the stock has recorded a year-peak-to-date return of -69% this year, and is fast approaching the levels it was prior to the massive rally recorded in 2020.

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Win big or go home empty

Thus far this year, penny stocks have dominated the list of top gainers and losers in the market. On the bullish end of the performance spectrum, these cheap stocks account for six of the ten leading stocks, with exceptions like Seplat benefitting off the macroeconomic tailwinds that emerged as a consequence of the sustained rally in the international oil market. In a similar fashion, penny stocks constitute an overwhelming majority of the top losers in 2021, accounting for nine of the ten lagging stocks.

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