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Steer clear of volatile penny stocks

There has been several discussions on trading and investing communities regarding the crash of the GetBucks Microfinance Bank share price from around ZWL15.72 to ZWL4.84.

Batanai Matsika

The counter began the year with a share price of ZWL 0.125 and hit a high of ZWL15.72.

More recently, the share price de-rated but still shows a year-to-date gain of 3,778%.

This ranks it as one of the best on the Zimbabwe Stock Exchange (ZSE) in terms of year-to-date performance.

GetBucks Zimbabwe is a financial technology company that commenced operations in 2012 as a credit-only microfinance institution but has over time grown into one of the leading microfinance lenders in Zimbabwe. Piggy has been assessing ZSE year-to-date share price performances and it is interesting to note that the top gainer is Unifreight which has registered the highest YTD performance of 15,453%.

Other top movers are NTS (3,705%), Willdale (926%) and General Beltings (892%). The share price movements of these stocks that are well above 500% can be attributed to a penny-stock anomaly given the levels of market capitalisation.

Penny stocks (also known as micro-cap stocks, nano-cap stocks or small cap stocks) are common shares of small public companies that initially trade at low prices per share.

It is also a term for inexpensive stocks that subsequently become highly lucrative holdings.

The U.S. Securities and Exchange Commission (SEC) defines “penny stock” as a security issued by a very small company that trades at less than USD5 per share initially.

We highlight that such stocks present a high risk for investors, who are often lured by the hope of large and quick profits. Penny stocks can be highly volatile and subject to manipulation through “pump and dump schemes”.

Another risk is that penny stocks have little liquidity, so holders of shares in penny stock companies often find it difficult to cash out of positions.

In most cases, a small percentage of penny stocks on a given stock exchange have truly novel high demand products while they commonly experience short term explosive trends on varied news-flow.

These rocket stocks can jump 55% to 99% of a climax after several hours to a few days without reliable technical warnings and may then plunge at a time when most investors least expect it.

In a nutshell, penny stocks are considered to have higher risk and higher potential rewards than most other “more conventional” investments.

Their speculative value can be extreme while their visibility and accessibility of operational results is usually very poor.

Few financial professionals venture into the field of penny stocks because they are either unwilling or unable to do the work required to accurately predict what these highly explosive shares may do.

Sometimes investors can be influenced by emotions, herd-behaviour and the fear to losing out. Here are some of Piggy’s tips to help avoid emotional snags;

  •  Do not fall prey to sensationalised news headlines;
  • Diversify your portfolio;
  • Think long term;
  • Set up your investment goals and stick to your overall plan;
  • Never go into an investment with expectations of quick returns and fast money;
  • Do not blindly follow the herd;
  • Do not get attached; and
  •  Always consult an expert.

In conclusion, the advice is straight forward: steer clear if you cannot stomach the risk associated with penny stocks! Get started on your trading and investing journey by downloading a copy of the SECZIM Investor 101 Handbook from www.piggybankadvisor.com

Matsika is the head of research at Morgan & Co and founder of piggybankadvisor.com. — batanai@morganzim.com / batanai@piggybankadvisor.com or mobile: +263 783 584 745.

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