In what was considered a step towards standardizing the Nigerian equities market and its primary stock exchange, the 50 kobo artificial floor, which was set for the price of stocks, was removed, or reset to 1 kobo.
According to SEC: “notwithstanding its par value, the price of every share listed on the Exchange shall be determined by the market, save that no share shall trade below a price floor of one Kobo per unit (N0.01)”.
The artificial floor was set to protect listed firms from having the value of their shares erode beyond a minimum level. With the removal of the floor, companies could now find their share price in a free fall, right down to the very bottom.
“The market cap of equities could be significantly eroded by this rule at the initial period as the downside risk increases, says Olufukeji Adegbeye, a Lagos-based trader of global markets, and a former sales trader in one of Nigeria’s top 3 stock broking firms.
The rule could lead to traders actively selling off, and then bidding down the price of stocks in a bid to discover a new level for them. When their prices have been sufficiently bid down, then they could seek to re-enter their previous positions at a much lower price.
This move will be prompted by the desire of traders to test the market to see how low prices can go, and discover how cheaper stock valuations can be.
The most affected stocks will be the penny stocks that trade around 50 kobo, as they are closer to the bottom already.
“Investors with a lot of penny stocks in their portfolio could be among the first to be hit by a sell off. Stocks between 50 kobo and N1 per share could be in the firing line as investors reassess their values”, says Ugodre Obi-Chukwu, publisher of Nairametrics, a stock market and investment analysis blog, and Convener of the Nigeria Retail Investors group (NRI).
“Penny stocks could collapse”, Adegbeye says.
Some analysts believe that this move will help to weed out redundant stocks that have been unjustifiably sustained by the artificial price floor.
Buying and selling activity, especially at the penny stock level could be revived, as these redundant stocks that have remained moribund and unattractive begin to regain their appeal on the back of cheaper-than-ever prices.
Also, this new rule could provide an incentive for better performance from the management of companies whose shares will become the target of increased speculative trading attack, as traders and speculators can now sell them all the way down to the rock bottom.
While analysts believe that this step was a necessary one that should be taken, a delay in execution by the NSE’s management is seen as a mere postponement of the ‘evil day’, which will eventually come at some point.
The events immediately following this policy move could prove to be a sour one for equity investors, as opposed to traders, as equities go through the period of new price discovery.