How to make money from your losing stock

Did you know that if you buy a stock at a high price, then the share price dips and appears hesitant to recover, you can actually mitigate your loss and exit with a profit?

We sample the case of Home Afrika over the past 12 months to illustrate how.

On 15 July, 2013, Home Afrika listed at the NSE’s growth enterprise segment. Almost immediately, the price shot from Sh12 to Sh25. With 405 million shares, the firm received a Sh10.1 billion in valuation. This was a Sh5.3 billion jump in market valuation.

As the stock tried to establish equilibrium price, Home Afrika announced that it would be going for a REITS issue, sparking a sharp drop in price. Between 15 July and 1 October, 2013, the price fell to Sh6 from Sh25 before hitting Sh9.05. Between 14 October, 2013 and 2 January, 2014, the price fell to Sh5.40.

An investor who pumped Sh100,000 into the stock at Sh25 a piece was now staring at a loss of Sh78,400 while an investment of Sh500,000 was bringing in a loss of Sh392,000.

According to Mr Daniel Waweru, head of risk compliance at Dyer and Blair, investors who have lost money after buying stocks like Home Afrika on a high only for the price to nosedive can recover and make profit through a process known as averaging down.

It involves buying more shares of the same stock at a lower price than the average price of the stock held.

“However, this is for brave investors who don’t believe in losing money at the bourse,” he says.

For example, if you bought 100,000 Home Afrika shares at Sh10 per share, your investment is currently at Sh530,000 at a price of Sh5.30 per share. You have lost Sh470,000. To recover and make profit, you will need to buy more shares at the current price to bring down the average price of your stock. Assume you buy one million shares at Sh5.30, you will take your average price to Sh5.85.

“If the price then climbs to Sh6.50, you can then exit with a net profit of Sh867,850 from a loss of Sh470,000,” says Mr Waweru.

According Mr Muammar Ismaily, head of research at Genghis Capital, the Home Afrika stock has been going through a price discovery. “It was not wise for investors to enter the stock at Sh25 when it was yet to find its equilibrium price.

“An investor may opt to hold on to this stock and wait for the ongoing projects like Migaa and Lakeview to start bringing in money. This may bring back the stock price to Sh12. But the stock may not attain its highest price of Sh25 in the near future,” says Muammar.