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Investment Tips

Treasury Bill Investment: Ghana Vs Nigeria

Treasury bills are a form of IOUs issued by the governments of various countries aimed at monetary regulations and budgetary financing.

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Nigerian Treasury Bills falls to 3.05% per annum, Nigerian money markets

As has been the pattern, I received an email from someone who said she had fallen in love with my articles, thankfully, not with me, and she asked if she should invest in Nigerian or Ghanaian Treasury Bills. I was like, what an audacious question!

One thing, good or bad, that technology has brought on us, through the internet, is that the World has become a global village. Now it is possible to send money from one part of the globe to the other in minutes, video calls with skype or WhatsApp and others are prevalent and instant. It is now easy to see things in real-time in faraway countries. With internet trading platforms, it is now easy to stay in one country and trade the shares and other financial products of another country, within limits of regulatory permissions. It is this “ease of doing business” on the internet that has prompted that reader to ask if it is more profitable to invest in Nigerian Government Treasury Bills or that of Ghana.

What are Treasury Bills?

Treasury bills are a form of IOUs issued by the governments of various countries aimed at monetary regulations and budgetary financing, among others. A lot of factors go into play in determining treasury bill rates, including the prevailing trend in yield curve, the financial or economic stability and creditworthiness of the issuing country, rate of inflation, political stability, among a long list of factors. Treasury bills come in terms of 91-day, 182 day and 364-day terms (corresponding basically to 3-month, 6-month and 1-year). Depending on trends in interest rate in relation to maturity dates, otherwise called yield curves, longer-term treasury bills are usually expected to have higher interest rates.

Treasury Bill Investment: Ghana Vs Nigeria

Ghana Vs Nigeria Treasury Bills rates

Between Ghana and Nigeria, Treasury bill rates differ. A 91-day Treasury bill in Ghana pays 14.685% while the same pays 9.5% in Nigeria. Likewise, a 182-day and 364-day treasury bills pay 15.14% and 17.91% respectively in Ghana but in Nigeria, they attract an interest rate of 10.45% and 11.5% respectively.

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What does this mean?

What the above numbers mean is that looking at it purely from the interest rate point of view, Ghanaian Treasury Bills look more attractive than Nigeria’s, but that is not all that go into the decision-making process.

[READ MORE: Official: Nigerian Treasury bills calendar for September – November 2019]

Exchange rate and purchasing power parity

In Ghana, the medium of economic exchange is the Cedi while it is the Naira in Nigeria, therefore, to buy Ghana’s Treasury Bill, you will need the Ghanaian Cedi and when the Treasury Bill matures, you will need to reconvert the resulting Cedi into Naira for repatriation. There is therefore an element of interest rate risk involved in such cross-border investment because if the exchange rate moves against you, the gains from the interest rate differentials could be lost through exchange rate effects.

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Political risk

Political risk is another risk that one may factor into the decision equation. Political risk is the risk that a change in government may result in a change in policies that may either make it difficult to repatriate the proceeds of your investment or affect your investment adversely. There are other risks in cross border investment like legal and sovereign risks. While legal risk is the risk of loss caused by an unexpected application of law or regulation, sovereign risk is the risk of possible restriction of assets imposed by a government.

Do the Math

Having looked at some of the issues or risks that may affect cross border investments, let us do the math and see how it pawns out. Assuming that you have Ten million Naira that you intend to invest in either Treasury Bills in Nigeria or Ghana, at the prevailing interest rates on various treasury bills. At the current Cedi/Naira exchange rate of one Cedi to N67.08, ten million Naira translates into 149,075 Cedi.

By investing N10 million in a 364-Day Treasury Bill in Nigeria, you will receive interest or return of N1,150,000 (at the rate of 11.5% Per annum) after approximately one year. In the same way, by investing C149,075, (which is the equivalent of N10 million) into a 364-day Ghana Treasury Bill, you will get a return of C26,692, (at a rate of 17.9051% per annum) which translates to N1,790,510 at an exchange rate of C1 to N67. Since Treasury Bills are issued at a discount, you need to invest N8,850,000 to receive N10 million at the end of 364 days in Nigerian Treasury Bill while you need to invest, C122,384 in Ghana Treasury Bill to receive C149,075.73 at the end of 364 days. If the exchange rate between the Cedi and the Naira remains relatively the same over the 364-day period, the C26,692 received from Ghana Treasury Bill which translates to N1,790,510, makes the Ghana 364-day treasury bill N640,510 more profitable on a N10 million investment.

Investment objectives

People have different objectives for investing. While so invest as a patriotic duty in their countries treasury bills others invest across borders in search of more return. Your investment objective should be your guide here.

[READ ALSO: Nigerian Treasury Bills: Learn everything about Tbills]

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Treasury Bill Investment: Ghana Vs Nigeria

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No arbitrage opportunity, after all

In international trade and finance, there is what is called the law of one price. That law states that in an efficient market with free flow of goods and services, a commodity should have one price regardless of what country it is purchased from. If this law does not hold, then the situation will present an arbitrage opportunity, where the commodity can be bought in the country with low price country and sold in a high price country. Given what has been uncovered with respect to Ghana and Nigeria Treasury bills, one may ask if it would be profitable to borrow money in Nigeria and invest same in Ghana treasury bills, repay the loan with interest, at maturity and pocket the difference. That would have been an easy way to benefit from the arbitrage opportunity, but unfortunately, the additional return is about 6.4% on a 364-day T-bill, a rate that is far below the lending rate in Nigeria. Therefore, the high lending rate makes the arbitrage opportunity nonexistent.

Disclaimer: Nothing in this article should be construed to be a piece of investment advice, the author is not an investment adviser and whoever makes an investment decision based on this article does so at his or her own risk, without any liability on the part of the author.

Uchenna Ndimele is the President of Quantitative Financial Analytics Ltd. MutualfundsAfrica.com and mutualfundsnigeria.com (both Quantitative Financial Analytics company website) is a leader in supplying mutual fund information, analysis, and commentary on African mutual funds. We provide reliable fund data; and ratings information that will add value to fund managers, the media, individual investors and investment clubs.

12 Comments

12 Comments

  1. Chinelo Ugwu

    November 15, 2019 at 11:18 am

    Hmmm…quite interesting.

  2. Anonymous

    November 15, 2019 at 4:01 pm

    Nice article Uche but I was waiting for you to also bring up the fact that exchange rate risk in Ghana is higher than in Nigeria for now and for the past two years, given that the cedi has been depreciating to the dollar and the naira (it is more of a floating currency than the naira, which is managed). With the rate of depreciation, the return on the Ghana TB is probably less.

  3. Carrington

    November 15, 2019 at 4:17 pm

    Nice article Uche but I was waiting for you to also bring up the fact that exchange rate risk in Ghana is higher than in Nigeria for now and for the past two years, given that the cedi has been depreciating to the dollar and the naira (it is more of a floating currency than the naira, which is managed). With the rate of depreciation, the return on the Ghana TB is probably less.

    • Uchey Ndimele

      November 16, 2019 at 2:56 am

      Thanks for your very truthful comment. I was going to connect the exchange rate risk when I talked about purchasing power parity but did not have enough to conduct a credible time dependent regression analysis to judge the fluidity or trend of the Cedi. Such exchange rate risk can be managed by going with short dated Treasuries although those attract less interest. Good comment though and that is why we are here, to exchange ideas and information. keep them coming

  4. Ayotunde

    November 15, 2019 at 4:46 pm

    This is highly interesting, this is what younger generation should know about for a better future.. I’ll like to know sir, what will now happen to the real capital one invested in the TB after the term ended?

    • Tom

      November 16, 2019 at 12:59 pm

      Read the article again bro, I think I saw he mentioned the fund are given at a discount.

    • Anonymous

      November 16, 2019 at 3:23 pm

      @Ayo,
      Interest is always paid up front. That means when you invest in tb, your interest will be paid the day you invest while your capital will be paid at maturity.

  5. Jude Aneke

    November 15, 2019 at 8:07 pm

    Please what’s the present TB interest rate in Nigeria?

  6. IBRAHIM OLAGOKE RAJI

    November 15, 2019 at 10:55 pm

    Good job, Uche. However, I am at a loss about how you concluded that the 6.4% differential must be more than the lending rate to exploit the arbitrage opportunity.

    The Interest Rate on the Treasury bill itself is a risk-free lending rate, which implies that big players like Banks can borrow at that rate plus some few bps spread and then reinvest the borrowed funds in Ghana.

    If exchange rate risk is sufficiently hedged, there may truly be an arbitrage in there, leaving us with political, credit, legal and sovereign risks.

    The calculation may be worth looking at deeply.

    On second thought though, the market is sort, if there was an arbitrage, it would have been exploited.

  7. IBRAHIM OLAGOKE RAJI

    November 15, 2019 at 10:56 pm

    ***the market is smart..

  8. Anonymous

    November 16, 2019 at 10:45 am

    Interesting read, however, you didn’t highlight the recent CBN circular on participants of Open Market Operation in Nigeria today.

    The Treasury Bills market has moved

  9. Ajayi Gabriel

    November 16, 2019 at 11:41 am

    Nice one,we need more mobilization in any other sector apart from financial house. Thanks.

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Investment Tips

Where to invest $10,000 right now

Entrepreneurs, financial experts and investment analysts suggest what sectors or assets to invest in if you have $10,000.

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Where to invest $10,000 right now

The upsurge in COVID-19 cases around the world has kept global investors flocking the world’s safe-haven currency at an exponential rate, the high demand for the greenback is coming on the high geopolitical uncertainty prevailing in today’s financial market.

Also, it’s important to note at the currency market, the U.S dollar remains king. According to the International Standards Organization, 90% of currency trading done globally involves the U.S. dollar, most crypto assets, virtually the most liquid commodities are priced in the U.S dollar not forgetting about 40% of the world’s debt is dominated in the greenback.

READ: If you have N1m today, how would you invest it?

READ: Hackers, expose crypto wallets worth $150 million at Kucoin

So Nairametrics felt it paramount to ask a hedge fund manager,  entrepreneurs, and financial experts, about what sectors or assets they would invest in if they had, say, $10,000.

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Their responses were revealing and diverse as they were varied—ranging from; buying global equities, local stocks, real estate holdings to investing in digital assets.

READ: Key ‘side-hustles’ Nigerian Bankers supplement their income with

READ: What BBNaija winner, Laycon can do with N30 million  

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Gavin Smith, veteran trader, and managing partner at Panxora Crypto Hedge Funds.

I would scale into BTC $2,000 now, $2,000 when it comes off to $10,000, then add $2,000 at $9,000 and another $2,000 at the $8,000 level. If BTC then breaks above $13,000 I would buy any of the above orders that had not been filled of the remaining $2,000. I would put $500 into each of these four DeFi protocols: LINK, COMP, KNC, and OMG.”

READ: Real Estate Developers express fear over selection process of CBN’s N200 billion Housing Fund

DeFi is an exceptionally volatile market and these would need active management, but they represent an opportunity with exceptional upside potential. This is a market our analysts are building a profile in, to advance our DeFi hedge fund later in the year.

READ: Real Estate: A universal convertible survival tool

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Debo Adejana – Founder, MD/CEO – Realty Point Limited.

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I follow the investment wisdom that says, ‘invest in what you know and understand’. I know and understand real estate probably more than any other investment asset class.

So, the decision as per what I will invest in with $10,000 which should be upwards of N4m is simply; Real Estate. I will either do rental income property as part of a properly organized shared-ownership structure or speculate on land depending on how much time I have with the money. The reasons are very basic, real estate investments have been known to survive and surpass any and every challenge.”

READ: If you had $100,000 in cash, where would you invest it in US markets?

Darlington-Morsi Onyemaka, Co-founder Quba Exchange Forbes Accelerator Cohort ’20.

One of the main pointers to a good investment portfolio is diversified across multiple asset classes which should be according to the investor’s risk appetite. Looking at my long-term investment strategy, real estate fits in perfectly for Ten-thousand dollar investment. My portfolio is already jam-packed with high-risk assets and Real Estate will do a great job at hedging the risk factors without minimizing profitability in any significant way.”

READ: Foreign investment inflow into banking sector falls by 95% in Q2 2020

Francis Obasi Cofounder and CEO of Lead Wallet.

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If I have a spare $10,000 right now for investment, first, I’ll invest 55% of the funds into new crypto startups being run by professionals and backed by companies like Coinlist; LID Protocol, and Binance. Second, I’ll invest 20% of the funds into Lead Token as there is still potential for massive growth in the coming months/years. Third, looking at the situation of Nigeria, and not knowing where the current protest (uprising) on #EndSARS is headed, I’ll reserve the rest 25% in USDC/USDT to hold against a potential Naira crash. I’m confident that there is every possibility that the Dollar will become scarce again in the coming weeks/months due to the ongoing protest, thereby returning instant gains for immediate spending on basic needs.”

READ: Ethereum robber transfers $1.5 million worth of Crypto

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Dapo-Thomas Opeoluwa Global Markets analyst and an Energy Trader.

“There are so many ways to invest $10,000. The real question depends on the investor. His risk appetite, his investment horizon, when does he or she want to liquidate? The answers to these now limit the options of investments. So for safe and long-term investments, I always advise investing in index funds, Eurobonds or the Nigeria International Debt fund. This is with the caveat that says ‘low risk equals low returns’. Also, I usually would say, invest in investments that beat inflation so you won’t suffer negative real turns.”

READ: Total, GTBank, Zenith Bank up, Bulls return to Nigerian Stock Market

Victoria Njimanze Investment Analyst at a Nigerian Investment Bank

Well, off my head I’ll go with Bonds, cryptocurrency, Stocks, and then alternatives.  I would definitely make my findings first, but I’ll make a larger portion go into Bonds say 40%, 30% in cryptocurrency, 20% in stocks, and 10% in alternatives like commodity market so as to have a diversified portfolio.”

READ: Cryptos: Nigerian financial experts talk risks associated with trading digital assets

READ: A mysterious Bitcoin Whale causes brief panic sell-offs at Bitcoin’s Market

Akinsola Esan, a credit risk analyst at Nigeria’s Tier 1 Bank.

Basically, the goal is to earn substantial returns on investments – dividends, capital appreciation, and secondly, beat inflation in naira which is currently about 12.85%. With $10,000, I’ll spread my investments across foreign equities such as purchasing and holding stocks of companies like Apple, Facebook, Google, Fastly, Nio, Amazon, to list but a few, and also buy some top-performing dollar-denominated Mutual funds such as Vantage dollar funds and some other ones recommended by Nairametrics. Lastly, I will look in the area of cryptocurrencies by investing as much in bitcoin, Ethereum, and other recognized Cryptos. There are some dividend-paying stocks listed on the Nigerian stock exchange as well, I will consider holding a number of them.

Explore Data on the Nairametrics Research Website

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Bottom line

Due to the present fickle nature of global financial markets, most financial experts interviewed above are unsurprisingly keen on mostly U.S dollar-dominated financial assets, thus reflecting the greenback’s dominance in demand amid the COVID-19  infection exploding at an alarming rate.

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Business Half Hour

How investing in US, UK stocks can be seamless – Tosin Osibodu

Tosin Osibodu discusses how investing in foreign stocks can be a more knowledgeable and transparent process.

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Investing in stocks has always been touch-and-go for Nigerians, both at home and in diaspora. A typical tale of the-more-you-look, the-less-you-see, many Nigerians have experiences – both real and imagined – of how they have lost some money in the stock market.

Amidst all of these, startups offering an opportunity to invest in foreign or local stocks have the problem of trust to deal with, before they can successfully break into the market.

Co-founder and Chief Executive Officer of Chaka, Tosin Osibodu, said this was a major challenge for Chaka when it launched in 2019.

Tosin was a guest on Nairametrics’ Business Half Hour radio programme where he explained that with Chaka, investing in foreign stocks have become a more knowledgeable and transparent process that enables investors to make informed choices.

Chaka, as Tosin describes it, is a gateway that allows Nigerians to easily invest in local and foreign stocks, and also allows those in diaspora to invest in local stocks.

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According to Nairametrics’ investment analyst, Olumide Adesina, Chaka “makes it easier for many Nigerians to access world brands like Coca-Cola, Pepsi, Twitter, Facebook, Amazon, General Electric, and provides top-class access to stocks listed.”

With Chaka, global stocks such as Apple, Alibaba, Google, Manchester United, the S&P 500 index and several others listed on NASDAQ, the New York Stock Exchange, and the Nigerian Stock Exchange, and top brands from over 40 countries are only a tap away for investors.

Averting the sour experiences

Sour experiences in investing are usually a result of poor knowledge of the market, and little or no access to market insights. As Tosin explained:

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“The market is not bad everywhere at the same time. The secret is knowing the right market to invest at any time, and having the right information.”

Information about market fundamentals, insights and knowledge of the right portfolio at any time will guide an investor towards taking the right buy-hold-or sell decisions, and the Chaka weekly webinars offer this.

Apart from the regular insights, investors can also rest easy knowing that they have the backing of financial regulators such as SEC, NSE, CSCS in Nigeria and SEC, FINRA, SIPC, IRS in the U.S. This is no mean feat for investment start-ups and Tosin admitted that getting the approval of these regulators formed a large part of the initial challenges.

Building automated trading systems to create wealth

During the years spent schooling as a systems engineer in the US, Tosin observed the ease of investing in the stock market, a direct contrast to what was obtainable in Nigeria. Though a systems engineer by training, he was passionate about solving the problem, and reducing access barriers to local and global markets.

Back in Nigeria, he teamed up with his life-long friend and cousin, Bolanle Osibodu to set up Chaka.ng. With a core financial expert and a systems engineer, the company was all set to get rolling.

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The goal was simply to reduce barriers to trading stocks across borders, and help Nigerians cash into the emerging mine that was the stock market.

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With the Chaka solution, investors can register, get verified, buy and sell stocks the same day. The no-minimum investment rule also makes it open to beginner investors, allowing them to buy as much as they can afford.

For instance, even though the share unit of a company is worth $500, an investor may invest $100 and free up funds to build a well-rounded portfolio. According to Tosin, “if you are above 18 years and interested in investing, we don’t believe that you should be restricted by funds”.

It also has other unique features like the Naira or Dollar conversion on a per-asset-basis so that you can see how a Naira investment would perform in dollar assets or vice-versa. Its low transaction charges and wire transfer fees makes it even more affordable for Nigerian investors, especially since there are no hidden charges.

Collaborations

There are other companies who serve as digital brokers to Nigerian investors. But rather than see them as competitors, Tosin and his colleagues regard these startups as potential collaborators.

“Anyone that does what we do and shares same vision is a potential collaborator,” Tosin said.

One of the ways of collaborating is by providing execution services, white-label services and market automation technologies for corporate and institutional clients, so that these companies integrate Chaka into their operations to provide solutions for clients such as KYC verification, and user-onboarding.

Chaka partners with Citi investment capital in Nigeria and a global broker in the US, through which its offers are regulated by the relevant bodies. The aim of all collaborations is not just for profit but to improve client trust, increase foreign direct investment, and improve the investment income of Nigerians.

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“Our focus is to create an amazing customer experience, because the more you can service customers in the way they want to be serviced, the better it is in the long term. This is seen in our lower commission rates, seamless onboarding process, best prices. We are focused on giving the buyer the most transparent offer,” he explained.

With a team of technologists and financial professionals working around the clock, Chaka remains on course to continually improve investment offers, and provide better decision-making tools to customers.

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Investment Tips

How to invest in small-cap stocks

Small capitalized stocks according to the NSE are listed companies with a market cap below $150m.

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Foreign investors demand for Nigerian stocks increases to N38.98 billion, Nigerians reveal why they pick their favourite banking stocks

There are two meat-pie shops in a city. One has two locations, while the other is a mega meat pie chain with 100 locations. Assuming they both have the same profit margin say 20% on cost of sales, which meat-pie chain will make more in terms of revenues?

Simple, the 100-location chain will have a higher sales volume and revenues because that chain can sell more pies. However, in terms of which restaurant is growing faster? Well, the answer is the smaller chain. How? The smaller restaurant is able to add say two more shops and grow by 100%, the larger chain can add 20 new location and just grow by 20%. A smaller base can grow faster than a larger base; its math.

READ: With $1 million, a delivery startup could acquire Trans-Nationwide Express Plc 

This is the same for stocks. All things being equal, a company with a lower share price is able to see an appreciation in her share price faster than another company with a higher-priced stock. Look at it this way,  a share price movement from N1 to N2 represents a 100% gain in market price, but a stock priced at N200 per share will need the share price to move to N400 for a similar gain of 100%.

A small capitalized stock will have a faster growth rate than a high capitalization stock because the lower-priced share can double faster than shares of higher-priced high cap stock. This is the lure of smaller capitalized stock; they can post price increases faster than large-cap stocks.

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READ: Global Stocks rise on high hopes for a COVID-19 treatment

Small capitalized stocks (small cap), according to the Nigerian Stock Exchange, are listed companies with a market cap below $150 million. Capitalization is simply the total number of shares issued by the company multiplied by the share price of the stock. As at June 2020, small capitalized stock had a cumulative market value of N971 billion ($2.51bn). Small caps as a sector also outperformed the total NSE ASI index – the small caps returned a negative -6.61%  as compared with negative -18.31 returned by the broad NSE index of all listed stock.

Small caps stock is sometimes termed as growth stock because they still have tremendous opportunities for growth. In our earlier example, the meat pie company with just two outlets can grow to add hundreds of new outlets, thus boosting earning and subsequently the share price. This means when the investor is considering small-cap stock, he is looking for a high growth stock, in this case with a slightly higher P.E. ratio but trading at a price below future earnings. Small-cap investing is trading on price movement, not dividend per say, its trading not on market share but price movements,  It’s a momentum play. Whilst earning is important in setting a future direction for the share process, the investors is focused on price arbitrage to take advantage of mispricing. This makes trading in small caps very risky and capital can be lost.

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READ: How BTC Whales can push BTC market value to $1 trillion

How does investor trade on small cap?

Since the driver is momentum trading driven by daily prices, a key metric to screen with is price movements of 15% band from 52-week price high of small caps (N60b in market caps) with an average 90-day trading volume of 2m shares with a Price Earning ration below 15 and Earning yield above 15%

From my screen, I get these candidates:

  1. Berger Paints
  2. Fidelity Bank
  3. Fidson Drugs
  4. First City
  5. May and baker
  6. Presco
  7. United Capital
  8. Vita form

Again, you can construct your own screen. What is key is to seek out a stock with a market cap below N60 billion, that is constantly trading but selling today at a price below its 52-week high. This pricing can simply be the result of COVID-19 induced slow down. Then buy that stock at a price that is “cheap” hence the lower P.E. Ratio, most importantly, you want to build in some risk management by buying high historical dividend yield stock to ensure if you have to hold, you receive a divided yield higher that the risk-free rate.

Stock trading is risky and you can lose your capital, the stocks listed above are illustrative and do not constitute buy or sell advise.

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