Question & Answer Series

How Safe Is it to Invest in Penny Stocks and What's the Right Time to Start Investing?

Q: This reader asks: "I want to know how safe it is to invest in penny stocks and what is the right time to start investing and the particular group of stocks to buy. I am a small investor hoping to invest about 1million naira both in penny stocks and higher stocks, but I am finding it difficult to pick some stocks because my stockbroker is not really impressive. Whenever you send an email for advice, you can never get a response from them and when one calls you get a negative response. Please kindly advice me on what to do".

A: It's really pleasant to know that you have become one of our rapidly growing SmartPro family members. It's great too, to know that you are impressed with what we are providing online. Thanks.

To your questions. First, no investment is absolutely safe. They all involve risk, even though they equally offer the potential to make money and grow financially. You just have to balance the risk and return potentials, knowing that you could make a lot of money and can also lose money. It is to achieve the best results possible that investment options are researched and evaluated.

Penny stocks, like other investment options, offer both prospects. You can make money and also lose money. Stocks are a generally riskier investment than some other financial assets. Among stocks, the penny category is also believed to be even riskier. The reasons are explained in our previous article. It was also pointed out in that article that penny stocks attract some investors who find them as offering a higher potential for capital growth. You will perhaps say it's the case of more risk potential for more profit potential. More importantly, that article stresses how you can go about discovering possible gems (truly under-priced value stocks) within that penny bunch. When you succeed in getting them, you stand a real chance of earning good money.

The right time to start investing is just now. Every passing minute is more like an opportunity lost. You investments enjoy a lot of benefit from 'time' and the earlier you put that into gear, the better for you. Read one of our articles on early timing of investment action.

There is no specific group of stocks to buy. Each person constructs his portfolio based on many personal factors as well as his perception of market direction. It's a continuous process of selection and refinement. You only need to start somewhere and make progress. Taking the first step is crucial. How much you have to start the process will also influence what to start with. With up to N1million as you stated, you can go very far in building a sizeable initial portfolio. You could pick from stocks in banking, insurance, food and beverages, building materials, etc. There are good stocks in most sectors and you could benefit from picking from a few of them. Just note that there is no perfect determination of what works, so don't delay, hoping to determine the stocks that will double in value in one month.

Simply buy into some companies that you know to be performing well in terms of their business and the operational results being achieved. That requires finding out a bit about their businesses and the quarterly and annual results they have published recently. You can also pick from the press what is said about the target companies. Very important is what projects or measures they are undertaking that will impact positively on their future performance. Choose a few companies your are happy with and begin there. Once you are in, the next challenge is to keep a watchful eye on what is happening to those companies so as to take appropriate decisions whether to buy more or exit. You also keep judging what is happening with other companies to know which ones to add to your portfolio. For instance, you may, at a point, see the need to sell what you currently have and to switch to other stock(s). Simply, it's a continuous process, but can't be perfect from day one or at any point for that matter. They more you work on it, the better it gets, possibly. Bear in mind too that all your pickings will hardly ever perform to expectation. If you have done a good job of it, however, you will have more good performers and some that will exceed your calculations. That's how it balances out, ensuring that you, overall, earn excellent returns.

If you are not happy with your stockbroker, it makes sense to switch to another. Besides, you must aim to develop your own capacity to evaluate stocks, track the market and make relevant judgment. Reading will help: financial and investment books, online resources, etc. It's a worthwhile investment. Also, when we offer some of the services that can help you in these processes, I hope you will find it reasonable to subscribe.

Here's hoping that you find our views useful.

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