On Monday, the 29th of January, the Nigerian Stock Exchange will officially yank off the 50kobo minimum floor or par value for stocks trading on the exchange. Before now, a stock could not drop below its 50kobo par value, even if the owner was willing to sell below that price just to cash out.
In its circular dated January 24th, 2018, it informed investors that the “new Par Value Rule specifies that the price of every share listed on The Exchange shall be determined by the market forces and equities may now trade below the erstwhile price floor of fifty Kobo (N0.50) per unit.”
As a retail investor it is important that you understand how this new initiative by the Nigerian Stock Exchange could impact on your portfolio in the short to medium term. Will your portfolio value crash? Or will it make it even better?
We have always been supportive of a market that fully determines the price of an asset rather than one that is restricted to regulatory price floors or ceilings. If a stock has no limit to how high it can rise to, based on its market valuation, it surely should not have a limit to how low it can go. It is quite frustrating if you own a stock that you want to sell for any price and do not have any buyer because of a price floor of 50kobo even if you do not mind selling it for lower. There are some priced at 50kobo that are certainly worth much lower but have for long being shielded by the fiat floor price.
With the removal of price floor, it is expected that investors have better opportunities to dispose of stocks that they have held for far too long because of the price floor. It should also put more pressure on owners of quoted companies that have perennially underperformed by hiding behind the price floor to continue to erode shareholder value. As the value of a stock continues to drop it exposes the company to takeovers from potential investors.
Removing the floor is also expected to help deepen liquidity in the stock market, particularly with stocks that have remained doggedly at the 50-kobo floor for months if not years. Data from the Nigerian stock market reveal about 42 stocks out of the 163 currently quoted on the main and premium board are priced at the dead-beat price of 50kobo per share. Taking this floor away means investors can now price the shares at a price lower than 50kobo, giving investors who own the stock an opportunity to off load them.
How low can it go?
Share prices can now sell for as low as 1kobo per share as long as there is a willing buyer for it and it meets the minimum volume required for the share price to move.
How quickly could 50kobo stocks drop
New rules by the stock exchange also revealed that stocks lower than N5 per share will need just 100,000 units of shares to move either way. The price movement per 100,000 is N0.01 or 1kobo. So, a 50kobo stock could drop as low as 45kobo and it could take it up to 10 days to move from 50kobo to 1kobo per share.
What stocks are likely to be affected?
Like we explained there are 43 stocks currently trading at 50kobo per share and have been trading at that price for years. Notable among those stocks are ABC Transport, Chams, Courteville, Japaul, Lasaco, Standard Alliance, Tantalizers etc.
If you own these stocks, then it is important that you track what will happen to their share price in the coming days.
What about other stocks?
There is also risk that stocks trading close to 50 kobo could also be in danger of dropping below that share price. Some analysts believe this also played a part in the sell-off that ensued last week, especially from penny stocks. Notable stocks in the immediate danger of dropping below the 50 kobo mark are AIICO, AG Leventis, Neimeth and Wapic. If you own these shares, then it is in your best interest to closely monitor their share price movement.
Have any further questions? Hit the comment section and a member of the team will be ready to respond to you.