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Penny stocks in Nigeria are ultra-low-cost stocks that you can buy and sell for less than 50 kobo to 1 naira per share. This means they are often bought and sold in high volumes. Even though this kind of stocks may look cheap, they come with high risk and volatility.
Tips on how to trade Penny Stocks.
Penny stocks are considered highly speculative (and high risk) investments due to their lack of liquidity. These 3 tips on how to trade penny stocks will serve as a guide for you.
1. Know when to sell your penny stocks.
It’s very rare for a penny stock to be a long-term buy-and-hold investment. The sector is built on short-term trades, so it’s as important to know when to sell as it is when to buy. If you notch sizeable gains over a short period in a penny stock, consider booking them now rather than waiting for bigger profits that may never materialize.
2. Limit your holdings and diversify.
Don’t be excited about the prospects for your favorite penny stock, you still need to protect yourself. Cap your losses by limiting your holdings in the stock to no more than 1% or 2% of your overall portfolio. It also makes sense to diversify your penny stock portfolio, which shouldn’t exceed 5% to 10% of your overall portfolio, depending on your risk appetite.
3. Check liquidity and trading volumes.
Even if you’ve made a successful investment in a penny stock, you’re going to need to be able to sell your shares. You should have adequate liquidity and trading volumes in the stock so that you can trade it efficiently. Otherwise, you may wind up in a situation where there are few buyers and wide bid-ask spreads, making it nearly impossible to convert your paper profit into an actual one.
Penny stocks fraud.
The most common way penny stocks are manipulated is through what is known as “pump and dump” schemes. The company will pay penny stock promoters to blast hundreds of thousands of emails and post on social message boards fake news and falsified information about the company to generate excitement and encourage unknowing investors to buy. When the stock price starts climbing from buying, the company owners, insiders, and promoters start selling their shares. Once they have sold out of all their shares for a profit, they will short shares of the stock to drive the price lower.
