Successful investing requires more than just a little bit of know how and a dash of luck. It requires a cool head, an analytical mind, and the ability to make quick money decisions. This is always true when investing in the stock market. Investing naturally comes with a level of risk. The market’s activity fluctuates on a daily basis during the opening and closing bells.
Generally the stock market is supposed to grow in value over a period of time. This growth is actually an average of all of the stocks included on the market. While some may have increased in value throughout the day, other stocks will have fallen in value. In some cases growth can affect whole sectors. A sector is a block of companies involved in a specific type of business.

Movement in the market is affected by a number of different factors. News reports affecting a specific industry can cause investors to want to increase their holdings, or negative news can cause investors to exit as quickly as possible. These however, are not hard and fast rules. In some cases, favorable news can result in lower stock prices as more investors try and sell their shares. Once the stock price falls, it can rise quickly again as even more investors are interested in “buying low”.

According to analysts, the erratic movements of the stock market can sometimes be attributed to the large number of inexperienced and amateur investors. This can cause the irrational behavior as sometimes seen. Mass panic has been blamed, more than a few times, for making the market move in directions that completely contradict normal rules of behavior for the stock market.

Amateur investors have a tendency to make decisions based on press releases or rumors that is sometimes not even related to the value of a stock itself. Other causes could be the activity of day traders. Day traders usually trade in such large volumes that they can affect a stock’s price either negatively or positively.

Still other ways the stock market can be swayed is by a country’s attempt at correcting inflation. Usually raising or lowering the interest rate does this. These rates are an indicator of the financial situation for a country. If rates are either raised or lowered, the market activity will usually be influenced.

Some companies are able to increase their individual stock prices by releasing quarterly reports showing they have met or exceeded their profit forecasts. Also releasing information about new products or technology that can increase that particular sector’s value.

Conversely, if a company reports that they fell short of profit projections, the value of that companies stock will usually go down as investors sell off some or all of their stocks. Large shifts are usually due to overreaction to changes in risk.

Without the assistance of a professional, the market can be an unforgiving venture for the casual investor. This trend has begun to change due to better resources being available to investors on all levels. Research is a must for any investment.

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Although the Nigerian stock market is amongst the strongest and most profitable trading stocks in the world, it still involves risks. Stock Market Investors can lose capital if they are inexperienced and uniformed; especially if they are not aware of opportunities, risks and the position of future stock investment in Nigeria . At this moment in time while the world economy is slowing down, future stock investment can be seen as quite a good option in Nigeria as stock prices for companies are low. Future investment in Nigeria, as in any stock market should be carefully planned and done with the correct company.

Companies with historical stability and a strong brand name for example Cadbury is a good choice and hot stocks. As this is a permanently registered brand in people minds.
Some sectors of industry are safer to invest in. For example the food and beverages business, as people will continue to buy food in times of recession and therefore investors should look at investments in this sector. Another sector that is booming in Nigeria is the insurance sector, future investment in Nigeria is recommended to be done in this sector as policies which are beneficial to this sector are being implemented and there is much potential in this fairly young sector in Nigeria.

It is recommended that investors such as you carry out stock research on companies you wish to invest in the future and collect data of the companies. There are also many Stock market websites such as this one which will help you make the correct decision in where to invest in the Nigerian stock market as many factors must be considered before stock  investment is made. The source of this information can include the stock market books. It is also vital for you as stock  investor to have a reliable stock broker as they often have a good overview of what’s doing well and what isn’t. They can help you with future stock  investment in Nigeria as there are many opportunities for it.

When such resources are gathered you can look at the history of the company and the value of its stock over time, the profitability ratios can also be easily calculated and you can decide if the company is a wise choice to invest in or not. The Nigerian stock market is quite advanced now and future stock investment in Nigeria is becoming even easier as you can have updates through online  and that can help you decide whether to invest or even withdraw your funds from a particular company.

Ask any stock investor what a trading stocks under N10 is, and they will tell you it is a penny stock, microcap stock, or nano stock. These three terms are for the most part interchangeable. However the broader definition of a penny stock refers to a business’s aggregate value of its outstanding common shares, are more commonly known as its market capitalization rather than its stock price. However there is no set term that completely defines a penny stock.
To calculate the market capitalization of a company (the market cap) you must multiply the stock price of the company by the amount of shares that are outstanding. By carrying out this calculation you can find out what the total Naira value of all shares in the company are at any given moment in time.

Penny stocks are not traded on a stock exchange like other stocks but they are traded in the over-the-counter (OTC) market. For the trading of most stock an agent will act on the investors behalf and arrange a transaction directly between the investor and a third party. The broker then receives a commission for facilitating the trade.

A large proportion of all penny transactions are charged by brokers as principle transactions. This means that the broker is not paid any commission but rather makes its money on the spread, and by buying and selling at advantageous times. There is no single price at which penny stocks are bought and sold, but rather there are a number of different prices. The difference between the bid and ask price is known as the spread. The spread of many penny stocks are usually around 25-33% but can often be 50-100% or even more.

There are also always two bid and two ask prices, these are known as the inside and outside bid and ask. Keep in mind that it is the outside bid and ask that is of most interest generally. Penny stocks are also subject to mark up pricing. This is where a broker has held the penny stock in its account and has therefore taken some of the risk associated with market price fluctuation.

Although penny stocks are quite complicated and there are many problems associated with trading penny stocks as well as millions of Naris of loss, many companies still trade in them because they can help for example, struggling companies just starting up. The best way of finding a good investment is by consulting with your stock broker. However in the penny stock market be very wary of brokers who are only trying to sell and may not have your best interests in mind.

Penny stocks are low-priced stocks – usually with a value of less than N10– of small companies.

All of these factors – low price, lack of standards, and lack of stability – make penny stocks one of the riskiest investments around. It is true that if a company succeeds the payoff will be great, but the vast majority of penny stocks end in bankruptcy. Other reasons why penny stocks are risky include…

- Lack of information about the company.

- Low liquidity. Penny stocks are infrequently traded, so finding a buyer may be difficult. The price may have to lowered substantially to interest someone in buying the stock.

So penny stocks are risky but are there any benefits to them?

Not all penny stocks are frauds or companies facing bankruptcy. Some represent hard-working businesses that are struggling to meet the requirements to get listed on NSE. Investing in these companies offers real growth potential – you have the opportunity to get in at the ground floor and ride all the way to the top.

The difficulty is finding which companies have this growth potential. Getting this information requires a lot of research and unless you are willing to take the time to personally investigate a company, you may again be the victim of fraud. Some companies specialize in offering ‘inside information’ about companies selling penny stock, but they may simply be fronts for pushing a particular stock on unsuspecting investors.

There are two ways to play the penny stocks – do research or play craps. The low cost of these stocks means that you will not lose a lot money if the company goes under, and as long as you are prepared to lose this money penny stocks can be an interesting and fun addition to any portfolio. It must be stressed, however, that penny stocks should only make up a small portion of any portfolio. The odds are that most penny stocks will end up in a total loss.

Where to buy penny stocks?

If you would like to buy penny stocks you need to find a stock broker that will place an order for you. Many stock brokers will not cover them because of the difficulties in tracking them, but some online brokers specialize in penny stocks. Regulations require brokers to receive written confirmation from the client concerning the transaction. The broker is also required to give the client a document outlining the risks of speculating with penny stocks.

Finally, the broker must disclose the current market price of the stock and the amount of compensation the firm receives for the trade. Monthly statements must be sent to the client detailing market value of each penny stock in the account.

Why is a stock that costs N50 considered cheaper than another stock priced at N10? This question opens a point that often confuses beginner investors: the per-share price of a stock is thought to covey some sense of value relative to other stocks. Nothing could be farther from the truth. In fact except for its use in some calculations, the per-share price is virtually meaningless to investors doing fundamental analysis. If you follow the technical analysis route to stock selection, it’s a different story, but for now let’s stick with fundamental analysis.

The reason we aren’t concerned with per-share price is that it is always changing and, since each company has a different number of outstanding shares, it doesn’t give us a clue to the value of the company. Gone are those days when Nigerian Breweries in the brewery subsector was the most capitalized company listed on the floor of the Nigeria Stock Exchange. In the market now the banks are in a tussle over which of them will emerge the most capitalized bank because of the measure of their value.

For that number, we need the market capitalization or market cap number. Find below current StockPicks’ 40 most capitalized stocks.

The market capitalization is calculated by multiplying the per share price by the total number of outstanding shares. This number gives you the total value of the company or stated another way, what it would cost to buy the whole company on the open market.

Here’s an example.

Stock price = N50

Outstanding shares: 50 million units

Market Cap: N50 x 50,000,000 = 2.5billion.

To prove my opening statement, look at this second example:

Stock price : N10

Outstanding shares: 300 million units

Market Cap: N10 x 300,000,000 = N3billion

This is how you should look at these two companies for evaluation purposes. Their per share prices tell you nothing by themselves.

What does market capitalization tell you? First, it gives you a starting place for evaluation. When reviewing a stock, it should always be in a context like .. how does the company compare to others of similar size in the same industry? The market generally classifies stocks into three categories:

Small cap under N1billion units

Mid cap N1- N10 billion units

Large cap N10 billion units Plus

Some analysts use different numbers and others add micro caps and meg caps, however, the important point is to understand the value of comparing companies of similar size during your evaluation.

You will also use market cap in your screens when looking for a certain size company to balance your portfolio.

As I conclude this week,  don’t get hung up on the per-share price of a stock when making your evaluation. It really doesn’t tell you much. Focus instead on the market cap to get the picture of a company’s value in the market place.