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How to Invest in Penny Stocks

Penny stocks are ordinary shares of public companies that trade at low prices per share. For the Kenyan stock market, we can group all stocks that are currently trading below 5 shillings per share as penny stocks.

Why trade in penny stocks?

For an individual investor, trading in penny stocks has the following advantages:

  • Penny stocks may earn higher returns than trading normal stocks in a given market.
  • Penny stocks trading require less capital to invest compared to normal stocks in the market.
  • Penny stocks have high volatility hence reducing time period of realizing the investment.

Also Read: How To Invest Bitcoins in Kenya

Risks in trading penny stocks

There are two major risks in trading penny stocks:

  • First is the risk that penny stocks are more vulnerable to manipulation by large market participants. Since minimal capital is required to buy penny stocks, large market participants can purchase large quantities of the stock pushing the prices up. Other market participants would then buy the stock since it would be on an upward trend. The large market participant would then sell its shares leaving other small investors exposed. This technique is referred to as “pump and dump”.
  • Secondly, penny stocks are exposed to liquidity risk. Since most of the penny stock companies are small companies, the amount of shares offered are usually small. An investor may fail to cash out of the penny stock due to lack of liquidity (other buyers in the market) of the stock in the market.

Example: Penny stock versus normal stocks returns

We would evaluate the return earned from investing in a penny stock and compare it with the return earned from a normal stock over a given period of time with the same capital investment.

Also Read: Why Buying Your Dream Home is Financial Suicide

penny-stocks-returns

Source: Nairobi Securities Exchange and Kenya Brief Research

The above table indicates the outcome of investing in Kenya Airways (KQ), British American Tobacco (BAT) and Kakuzi stocks in the Nairobi Securities Exchange (NSE) over the last two weeks.

KQ (penny stock) price appreciated by 1.8 shillings per share, BAT (normal stock I) price appreciated by 12 shillings per share while Kakuzi (normal stock II) price appreciated by 11 shillings per share.

Though the normal stocks appreciated by larger margins than the penny stock, the overall return of the 100,000 shilling investment is greatest in the penny stock investment.

Overall return of the penny stock is 40.45% while return on the normal stocks are 1.45% and 4.33% for BAT and Kakuzi respectively.

Conclusion

Investments in penny stocks can yield extremely high returns for small time investors. You can invest as little as 10,000 shillings and earn decent returns (in the case of KQ stock above, you would earn about 4,000 shillings from 10,000 shillings investment) . The downside risk arises only when the company you are investing in is liquidated which rarely happens. Price depreciation risk is minimal since the stock is already close to zero.

Also Read: How to Invest In Treasury Bills (Individual Investor)

Note:

For those interested in investing in penny stocks, you can do this by opening a CDS account through a stock broker. You will only require your ID, passport photo, bank account details and other relevant documents depending on the stock broker. Below you can find some of the stock brokers in Kenya.

Dyer & Blair Investment Bank Ltd
Goodman Tower, 7th floor,
P.O. Box 45396 00100
Tel: 3240000/2227803/4/5
Fax: 2218633
Email: shares@dyerandblair.comWeb: www.dyerandblair.com
Francis Drummond & Company Limited
Hughes Building, 2nd floor,
P.O. Box 45465 00100
Tel: 318690/318689
Fax: 2223061
Email: info@drummond.co.keWeb: www.drummond.co.ke
Barclays Financial Services Limited
Waiyaki Way,
West End Building, Floor 5
Tel: + 254 (0)20 4254000 / + 254 (0)20 4254501 / +254 711 097000
Email: Barclays.kenya@barclays.com
Suntra Investment Bank Ltd
Nation Centre,7th Floor,
P.O. Box 74016-00200
Tel: 2870000/247530/2223330/2211846/0724- 257024, 0733-222216
Fax: 2224327
Email: info@suntra.co.keWeb: www.suntra.co.ke
Old Mutual Securities Ltd
IPS Building, 6th Floor,
P. O. Box 50338- 00200
Tel: 2241379, 2241408
Fax: 2241392
Email: info.oms@oldmutualkenya.comWeb: www.oldmutual.co.ke
SBG Securities Ltd
CfC Stanbic Centre, 58 Westlands Road,
P. O. Box 47198 – 00100
Tel: 3638900
Fax: 3752950
Email: sbgs@stanbic.comWeb: www.sbgsecurities.co.ke
Kingdom Securities Ltd
Co-operative Bank House,5th Floor,
P.O Box 48231 00100
Tel: 3276940/3276256/3276154
Fax: 3276156
Email: info@kingdomsecurities.co.ke
Afrika Investment Bank Ltd
Finance House, 9th Floor,
P.O. Box 11019-00100
Tel: 2212206 / 2210178/2212989//343639
Fax: 2210500
Email: info@afrikainvestmentbank.comWeb: www.afrikainvestmentbank.com
ABC Capital Ltd
IPS Building, 5th floor,
P.O. Box 34137-00100
Tel: 2246036/2245971
Fax: 2245971
Email: headoffice@abccapital.co.ke
Sterling Capital Ltd
Barclays Plaza, 11th Floor, Loita Street,
P.O. Box 45080- 00100
Tel: 2213914/244077/ 0723153219/0734219146
Fax: 2218261
Email: info@sterlingib.comWeb: www.sterlingib.com
ApexAfrica Capital Ltd
The Riverfront, 1st Floor, Prof. David Wasawo Drive, Off Riverside Drive ,
P.O. Box 43676- 00100
Tel: +254-020-7602525/020 2226440
Email: invest@apexafrica.comWeb: www.apexafrica.com
Faida Investment Bank Ltd
Crawford Business park, Ground Floor, State House Road,
P. O. Box 45236-00100
Tel: +254-20-7606026-35
Fax: 2243814
Email: info@fib.co.keWeb: www.fib.co.ke
NIC Securities Limited
Ground Floor, NIC House, Masaba Road,
P.O.Box 44599-00100
Tel: 2888 444 / 0711 041 444
Fax: 2888 505
Email: info@nic-securities.comWeb: www.nic-securities.com
Standard Investment Bank Ltd
ICEA Building, 16th floor,
P. O. Box 13714- 00800
Tel: 2228963/2228967/2228969
Fax: 240297
Email: info@sib.co.ke
Kestrel Capital (EA) Limited
2nd Floor, Orbit Place, Westlands Road,
P.O. Box 40005-00100
Tel: 251758/2251893,2251815,2250082
Fax: 2243264
Email: info@kestrelcapital.comWeb: www.kestrelcapital.com
Discount Securities Ltd. (Under Statutory management)
Nairobi,
P O Box 42489-00100
Tel: 2219552/38, 2773000
Fax: 2230987
Email: discount@dsl.co.keWeb: www.dsl.co.ke
African Alliance Kenya Investment Bank Ltd
1st Floor,Trans-national Plaza,
P.O. Box 27639 – 00506
Tel: 2762610/ 2762628 / 2762000/ 2762557/ 0733333140
Fax: 2731162
Email: securities@africanalliance.co.keWeb: www.africanalliance.com
Renaissance Capital (Kenya) Ltd
Purshottam Place ,6th Floor, Westland , Chiromo Road,
P.O BOX 40560-00100
Tel: 3682000/3754422
Fax: 3632339
Email: info@rencap.comWeb: www.rencap.com
Genghis Capital Ltd
Prudential Building, 5th Floor,
P.O Box 1670-00100
Tel: 8008561, 2337535/36, 2373984/968/969
Fax: 246334
Email: info@gencap.co.ke
CBA Capital Limited
CBA Centre Mara Ragati Road Junction, Upper Hill,
P.O. Box 30437-00100
Tel: 0202884000/+254 20 2884000 / 365, 0711056365
Fax: 0202734616
Equity Investment Bank Limited
Equity Centre, Hospital Road, Upper Hill,
P.O Box 75104 – 00200
Tel: +254-20-2262477 Mobile: +254-732-112477/+254-711-026477
Fax: +254 20 2711439Web: www.equitybankgroup.com
KCB Capital
Kencom House 2nd Floor,
P.O Box 48400 – 00100
Tel: +254 711 012 000 / 734 108 200, +254 20 3270000 / 2851000 / 2852000
Email: investmentbanking@kcb.co.keWeb: kcb.co.ke

 

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Posted by Timothy II Aperit

True believer in numbers. Statistics never lie. Bsc Financial Engineering MBA Finance ACCA