I got a call from my friend Nneka asking me how to invest in the stock exchange and what it is all about. I tried explaining on the phone and then figured it was better to just write about it for her and for so many other people out there who need to know.
Nneka: What is a stock?
Ugodre: A stock is a unit of a share of a company that is traded on the floor of the Nigerian Stock Exchange (NSE). It is also often referred to as a share.
Nneka: Where do stocks come from?
Ugodre: Every company has shares which the owners lay claim to. When you go to register a company at the Corporate Affairs Commission (CAC) you typically say your authorized share capital is N1m made up of 1m ordinary shares of N1 each. This means your initial capital at the start of your company is N1million represented by those shares.
Whilst the value of your capital may increase over time, your shares remain the same till you decide to increase it again and register the same with the CAC. When the shares are listed on the floor of the NSE they are tradable as stocks meaning people can buy or sell them.
Nneka: So what is the Nigerian Stock Exchange and what companies trade their shares on it?
Ugodre: The NSE is a market for buyers and sellers of stocks (shares) to transact officially. In Nigeria, like in most exchanges all over the world, a company needs to fulfill certain laid out criteria to be able to have its shares traded on the NSE. Some of the criteria are that the company must be a public company and must have more than 50 shareholders (owners).
Whenever a company decided to sell shares for the first time on the NSE, they perform what is called an Initial Public Offering (IPO). A subsequent offering of shares by the company can come as a Public Offer (PO) or a Rights Issue. I will come to these later.
Nneka: Are these the only ways people can buy shares on the Nigerian Stock Exchange?
Ugodre: As mentioned, the NSE is a market place for people to buy and sell shares. Therefore, those who buy shares during an IPO or during a PO can also sell those shares to willing buyers whenever they want. As such, once a company’s shares are listed on the NSE, their outstanding shares can be bought or sold provided there is a willing seller and a willing buyer with or without a PO. Stocks are traded every working day of the week.
Nneka: Can I buy any number of shares I want?
Ugodre: Just like in any market, the stock market is also limited to the forces of demand and supply. For example, whilst a company may have 10million shares outstanding (available on the stock exchange) only a portion of it may be offered for sale by its owners. Therefore if only 5million of those shares are regularly traded then the maximum you and any other willing buyer can buy is 5million.
Nneka: Is that why I hear a lot about banking stocks?
Ugodre: Exactly! An average bank has billions of outstanding shares (stocks) that are traded regularly on the NSE. Therefore people can buy and sell them more frequently, unlike a small firm that probably has just millions.
Nneka: Before you forget, what are the right issues and public offers?
Ugodre: Public offers are made after a company must have debuted on the floor of the NSE with an initial public offer. Companies make public offers when they see the need to source for money other than or in addition to debt to finance new projects, purchase fixed assets or simply expand the business. It could also be to repay debt or invest in research and technology.
When a company engages in a pubic offer they could offer new shares by increasing the share capital (thus creating new shares) to the public or offer those shares to existing shareholders only. Offering those shares to the existing shareholders only is called a Rights Issue. When they offer the rights of those shares to existing shareholders only, it means they mostly do so in the same proportion to what they already have.
For example, they could offer the right issue as 2 for every 5 owned. Meaning of you had 1000 shares you are offered an additional 400 shares. That way if all the rights issues are taken by the owners of the companies their shares increase in proportion to what they originally have.
However, this hardly happens as some may not be willing to take up their rights. This allows others to take it up and increase their percentage ownership. Rights issues can also be done in conjunction with a fresh issue to the public.
Nneka: So, can I just go to the stock market to buy shares on my own?
Ugodre: Not exactly. You can only buy shares through a stockbroker who is registered to a stockbroking firm. Therefore whenever you decide to buy shares look for a decent stockbroking firm and open an account with them. Some have a minimum amount of money that can be used to open an account. After opening an account you can then instruct them to buy and sell shares on your behalf from time to time.
They also give you statements of your stocks (portfolio) periodically so you know where you stand. In exchange for these services, you pay the fees.
Nneka: Fees Ke? How much are their fees?
Ugodre: Fees paid to stockbrokers are uniform and are approved by the Security and Exchange Commission (SEC) the regulatory authority for activities on the stock market. Fees are also paid to the NSE, SEC and being a transaction, VAT is also paid.
–Buying and Selling–
Nneka: Now, how do I start buying shares?
Ugodre: Before you start buying shares you have to identify companies and the share price that they are currently being sold for.
Nneka: What is a share price?
Ugodre: A share price is a price that a stock is currently sold for on the floor of the NSE.
Nneka: So are shares worth N1 cheaper than those worth N100?
Ugodre: Not exactly, in fact not at all. Shares are not measured that way. A unit share price is actually determined by dividing its market value by the number of shares outstanding. For example, a company that has 10million outstanding shares and market value or capitalization of N100m will have a share price of N10.
Similarly, another company that has the same market value of N100m but with outstanding shares of 20million will thus have a share price of N5. So you see, even though one goes for N10 and the other N5 they all have the same market value. The only difference is that they have a different number of shares and as such doesn’t mean one is cheaper than the other.
Nneka: So you mean the number of outstanding shares has nothing to do with the share price going up or down?
Ugodre: Not directly. The reason is that companies that have a higher quantity of outstanding shares are considered very liquid and thus do not get bogged down by the artificial premium (or value) scarcity causes. Scarcity like you know thus affects the price of things but does not necessarily mean they are cheap or expensive or even worth the price.
Nneka: Gosh, so how do I know if a share is worth the price or cheap or expensive?
Ugodre: Now that is the technical part and that is why you have a stockbroker. Stockbrokers are there to advise you on which stock to buy or sell or hold.
Nneka: What is buy, sell or hold biko?
Ugodre: “Buy” is when a stockbroker advises that you buy the stock because they believe the share price will appreciate in value. “Sell” means that the company is expected to perform badly in the soon to be declared results as such their share price may depreciate in value making you lose money.
“Sell” could also mean that they think the stock has reached its peak in terms of valuation and thus the price may start to crash due to owners of the stock hoping to sell and earn some profit. “Hold” means that the Stockbrokers are advising: do not sell if you own the stock. They say this because they expect the stock to rise soon or expect some news that will determine whether they should buy or sell.
Nneka: Ok! What if I don’t want to rely on a stockbroker for advice or more like I just want to be able to decide on my own whether a stock is cheap or expensive or bad?
Ugodre: Well, that depends on luck, a good eye for knowing good stocks and your investment horizon. Since the value of stock mostly depends on how the company performed in the past, currently performing and will perform in the future; it is important to identify companies that have the potentials to do very well in the three performance metrics I mentioned.
Therefore you must know how to analyze company financial statements. You can also rely on technical analysis which is somewhat basically making investment decisions based on history, trends and market information. For example, some people decide on what stock to buy by analyzing the past history of the stock in terms of its price going up and down at various times. Technical analysis also involves using charts and graphs to estimate the value of a stock. No need to bother you with all this. Just follow this link
Nneka: OK…I have heard of P.E ratios and Earnings per share, please what are they?
Ugodre: Earnings per share basically relates to the profit a company makes per every unit of shares held. Using the example above, assuming the company with 20m ordinary shares has made a profit after tax of N10million. Its earnings per share will, therefore, be 50kobo (N0.5).
Since it’s market price was N5 the Price Earnings Ratio (P.E ratio) is therefore N5 divided by 50kobo which is 10x. This means that those who pay N5 to own the shares are basically paying for a premium equal to 10x (times) the earnings per share of the company.
Nneka: Isn’t that too high?
Ugodre: Well, you rarely get a good stock that has a P.E ratio that is less than 5. Shares with single-digit P.E ratios are either undervalued or have company fundamentals that suggest the company is not doing well. In addition the premium you pay to own stock factors in the company fundamentals, growth potentials, brand strength, competitiveness of the business, taxation, debt amongst others.
Nneka: What if I do not want to sell a stock after I buy it. Or I don’t want to sell anytime soon?
Ugodre: Then you must like long term investing. That, of course, is very plausible and a good way to invest. That is what makes Warren Buffet very successful and one of the richest men in the world. Long term investing mostly relies on fundamentals rather than technical analysis. They are called Value investors.
Value investors do not necessarily rely on price movement since the performance of the company is more important. Since they invest for a long time, metrics like the financials of the company over the past 5 years and above, their competitiveness, the industry, management etc are the basis upon which they invest.
In exchange for this, they get compensated by dividends and long term consistent growth on their share price. Because you are holding on for the long term, it is important to buy very well run companies with good potentials at a cheap often called (intrinsic value) price.
Nneka: Dividends. How much do they pay?
Ugodre: Companies have different dividend policies. However, what you should concern yourself about is about much dividend they pay per share relative to the market price per share of the company. That is what is called a dividend yield. Using our example above, the company decided to pay out 20kobo out of the earnings per share of 50kobo as a dividend.
Based on the share price of N5, the dividend yield is therefore 4%, which N0.5/N5. Therefore for a long term investor, it means every Naira of your investments returns just 5% assuming you decide to not to sell the stock. However, stock prices do not necessarily remain the same and as such you will have to add the value appreciation as a return even though it hasn’t been cashed.
Nneka: Are there other sources other than dividends and selling shares?
Ugodre: There is also a bonus issue that companies also give to their shareholders. The bonus issue basically is when the company agrees to give out additional shares to its shareholders for free. I use the word free because you do not need to pay for them from your pocket. Shareholders can then sell those shares on the floor of the NSE should they want to and pocket the value whilst still maintaining the number of shares they had before the bonus issue. Some don’t even sell the shares preferring to just keep them and add to their portfolio.
Nneka: Really?? So is that why people are so excited whenever bonus shares are announced?
Ugodre: Yes! Often times, prior to when the bonus shares are issued, the share price increases because everyone wants to buy it. It also increases because there is a fixed date whereby the register of shareholders is closed also referred to as a marked down date. When a stock is marked down say May 15th, it means only those who own the share prior to May 15 will receive the bonus shares
Nneka: Does this Bonus share favour the company at all?
Ugodre: Well, it sort of does. Sometimes companies do not want to pay out dividends as cash opting to use the cash to invest back into the business. Therefore, to ensure the shareholders are able to cash in on some value returns they just issue them bonus shares in proportion to what they already own. Bonus shares can be one for every two held, one for one, two for five, etc. Some companies also pay dividends and bonus shares at the same time
Nneka: Thanks for the tutorial and hope I can ask more questions should the need arise
Ugodre: Yes you can. It was a pleasure explaining this to you.
Now that you are done reading this article. Follow this link for the next stage of your learning how to invest in Nigerian Stocks.
How to pre-qualify for your banks’ Retail/SME loans
The cash flow of borrowers taken in context with the nature of their businesses is crucial in determining their loan eligibility status.
The CBN’s directive of July 3rd 2019 compelling Nigerian Banks to maintain a Loan to Deposit Ratio (LDR) of 60%, wherein SMEs, retail, mortgage and consumer lending would be assigned a 150% weight in the computation of this LDR, has definitely been a game-changer in the industry as more commercial Banks focus on retail and SMEs to meet their lending quota in order to avoid stiff CBN sanctions that accompany noncompliance.
Indeed, the mass market has become the battleground for Nigeria’s financial institutions with institutional giants previously considered huge corporate giants jostling with Fintechs and MFBs for retail and SME customers, each outdoing themselves with mouthwatering rates and relatively easy to fulfil covenants for loans that are “a click away.” Naturally, this should be good news for the market as getting a loan has reportedly never been easier, but it is not. Most retail customers simply do not qualify for the type of loans they need.
No matter the pressure from CBN, banks are still profit-making institutions that are duty-bound to protect the interest of their stakeholders, hence their need to comply with best credit practices even when disbursing the smallest of amounts as loans. Their loans are thus, only given to those who meet their requirements, whose records show favourable odds.
Here are a few ways of increasing your odds at being pre-approved for your Bank’s retail/SME loan:
Consolidate your banking activities
If you are reading this, then I can safely guess you have an account in a Nigerian bank. If yes, then you probably have accounts with more than one bank; and you probably wear your resources thin trying to service these accounts because “they serve different purposes.” While this may be good for financial planning, it definitely works to your detriment in showing your true cash flow from your turnover.
Most retail loan applications require just one bank statement, and in the case where you may be allowed to present statements of more than one bank account for your loan application, a reviewer may suspect duplicity of transactions. Save yourself the hassles and consolidate your banking activities to one account for the purpose of your loan request; to show your capacity.
Ascertain your credit status
Do you have any outstanding debts owed to any financial institution? Perhaps you guaranteed a loan with your bank details or one of your abandoned accounts has a negative balance? Clear it before putting in your loan request.
Credit is mostly about character. Any financial institution willing to lend you money will make sure that you are in the habit of settling your debts, hence their need for a credit check. There are no forgotten loans in the system; whilst they may have been written off, they are not forgotten. Know your credit status today.
Build turnover and average balance
Turnover is the total amount that passes through an account within a period while the daily overnight balance on the account summed up and divided by the number of days under review is the average (daily) balance.
There is much emphasis on turnover amongst customers who seek loans; however, any credit officer worth his pay usually uses turnover in tandem with your average balance to make decisions on a loan request because the turnover addresses capacity while the average daily balance addresses available capital. Turnover may be easy to manipulate but your average daily balance is not. Build both.
“Show your workings”
As simple as it sounds, this could be the most common reason why some account statements are rejected as fraudulent and the loan requests of their owners denied – because they do not show any underlying transaction or pattern. They are haphazard at best.
It has become commonplace for SME owners to use their company’s account for personal expenses; withdrawing cash with their ATM cards and hardly describing their transactions in details such that a reviewer is unable to decipher who their suppliers or customers are from their bank statement. Not even salary payments appear to be recurring on these statements, as most transactions are in cash.
Account statements like this show early signs of impropriety that will have any credit officer doubting the management competence of the loan applicant.
All of these points, well-observed, may get you pre-approved but no loan is disbursed without a verifiable source of repayment. Collateral will definitely help to assure the lender but the cash flow of the borrower taken in context with the nature of the business is key.
While personal loans may be approved based on account analysis, valid Know Your Customer (KYC) documentation and credit checks (depending on the amount); contracting financial experts for proper bookkeeping and development of business plans could go a long way in getting your SME loan request approved.
How to grow rich with the power of profitable relationships (Part 1)
You need two currencies to become successful. The first currency is money and the second currency is relationships.
- There are two currencies you need in the world to grow rich and become more financially successful. The first currency is money and the second currency is relationships. These two currencies must work for you to create wealth and achieve financial success. And among the two currencies relationship is the most powerful and beneficial. This is because you can get to the top without money but with the right relationships. But you cannot get to the top having money alone.
Money needs relationships to thrives because all the wealth in the world is created in the context of a relationship. That is, two people must first like, trust and agree with each other to do business or engage in an income-producing activity to create wealth. And while Relationships can produce money, money cannot produce relationships. Thus, you can have all the money in the world and still be far behind in life if you lack important relationships.
Charlie “Tremendous” Jones, a one-time legendary speaker and author, puts it this way, “you remain the same person year after year except for the people you meet and the books you read. So, if becoming rich and wealthy is important to you. You must master the art of building profitable relationships and connecting with the right kind of people. Building relationships that produce wealth is thus the fastest way to get to the top. And getting to the top is all about connecting with people that have the advantage that you lack in your own life.
How then do you create profitable relationships?
To create profitable relationships, you must first recognize that there is an unequal distribution of wealth and advantage in the world. And that for you to be successful, you need to connect with other people. That is, those who have the advantages that you seek. The truth is other people have the answers, deals, money, access, power, and influence that you need to achieve your goals. And they will only give it to you if you are in a relationship with them.
There are two elements that must be present in a relationship to make other people want to invest in your own success. The first is trust. And the second is your ability to solve their problems or offer value. Trust is saying something and doing it consistently over a consecutive period of time. Solving problems for the people you want to attract is also key. This is because people generally care less about your success and more about their own success. So, the only way to get them invested in your success is to first solve a problem that they care about. And the only way for someone to open up about their problems to you is if you are in a close and trusted relationship.
What is a Close Relationship?
Close relationships are relationships that are bound by mutual interests, mutual respect, and mutual values. Most close relationships are formed within private and sometimes closed environments. A typical example is relationships formed within the confines of a family, a school, an office, a club, an estate, or an event. This kind of relationship is the most trusted relationship and it carries the greatest potential for wealth. Thus, to create wealth two things are important – the quality of your close relationships and your ability to convert strangers into close friends. All relationships must first become close for them to be beneficial for your success. Thus, without trusted close relationships and the ability to create them, it is hard to create wealth or achieve financial success.
Now you may say to yourself, ‘but I have close relationships, why am I not yet successful?’
The answer is simple.
While every close relationship has trust in them, not all close relationships can produce income. In fact, no close relationship is designed to automatically create wealth. You have to make them create wealth. Close relationships are like a seed. They are ineffective as seeds but when planted and nurtured can become trees. This means that you must master the art of planting and nurturing your close relationships to become wealth trees.
How do you build wealth-creating relationships?
Before I show you how to build wealth creating relationships. Let me first show you the two kinds of close relationships that exist.
The first is the wealth-consuming relationships. And the second is the wealth creating relationships.
Wealth-consuming relationships are relationships that use up capital. They are also known as social relationships. And comprise family relationships, certain friendship relationships, and religious associations. The way the members of this group add value to each other is by offering emotional or spiritual value in exchange for financial support. Wealth-consuming relationships are thus not designed to create wealth and it is hard to make them wealth creating in nature. Nevertheless, they are important relationships. And provide essential spiritual and emotional balance. So, the only way to thrive financially regardless of them is to combine them with the second kind of relationship – the wealth-creating relationship.
Wealth-creating relationships are relationships that produce income or enlarge opportunities. They are also known as professional or business relationships. Professional or business relationships comprise relationships with co-workers, peers, and club members. They also include relationships with your neighbors, customers, partners, vendors, advisors, etc. Members of this group are pre-sold on creating wealth. They are open to learning about new information. Discovering new ideas and opportunities. Open to doing business together and meeting new people. The way this group adds value to themselves is by pointing each other in the right direction. They connect each other to people, businesses, opportunities, and organizations that can help them. And they support each other through difficult times. Although most people have these relationships, they are still not wealthy.
The reason for this is simple
Professional and business relationships will not automatically create wealth for you. They have to be made to create wealth. These relationships are like seeds. They are ineffective as seeds but when planted and nurtured can become trees. This means that you must not only know how to develop these relationships. You must also know how to turn them into wealth trees. To convert professional or business relationships into wealth-creating relationships you need to do three things.
First, you need to become a high-income problem solver. Second, you need to become a value connector. And third, you need to join a wealth-creating problem-solving platform. Let’s look at each of these points in detail
1.Become a high-income problem solver
A high-income problem solver is anyone that solves problems that produce high income. Solving problems for people is the only way to create wealth and enter into high-quality relationships with other people. To solve problems, you need experience. And the fastest way to gain experience is through your own personal journey. Personal experience can make you an instant expert in an area that would usually take years of hard labour in school to develop. Being an expert is important to build trust with your close relationships.
For example, if you are passionate about weight loss but are struggling with losing your own weight, you have an excellent opportunity to become an expert in that area especially for those who are struggling to lose weight. All you need do is overcome your own struggles and lose weight. And then you can help other struggling people do the same. When you successfully solve your own personal problems, you become the expert that can help others solve the same problem. This makes you more magnetic and interesting to other people. The key here is to create such a rich life that has many inspiring stories, experiences, and achievements. You must reach the point in your life where you have a lot of “How Did You Do This” stories. How did you get enough money to start your first business? How did you rise to become the CEO of a multinational company? How did you overcome cancer? How did you stay married for 50years? How did you achieve Financial freedom etc.? The more “how did you do this” stories you have the easier it will be to connect with people and build rich relationships.
However, you must ensure that some of your how did you do it stories can produce high income. And involve solving problems that affect a lot of people. You must also ensure that you begin helping people as soon as you start taking the right steps and not after you have achieved your end goal. Sometimes being an expert does not mean that you are perfect or have arrived. It simply means that you have taken certain steps that others are struggling to take. And you can guide them. If you are ahead of anyone in a particular area you can become the expert in that area to them. Becoming a high-income problem solver is thus not just important for earning a high income but also important for building rich relationships. When you master the art of solving high-income problems you become a valuable person that other people want to meet.
To be continued next week…
About the author
Grace Agada is the most sought-after Financial Planning expert in the country and is quoted frequently in leading Newspapers, magazines, and blogs. Grace is a Renowned Keynote Speaker, Author, and Column Contributor in Punch Newspaper, This Day Newspaper, Vanguard newspaper, Business Day Newspaper, Leadership Newspaper, The Tribune Newspaper, and Online Platforms like Nairametrics, Proshare, and Bellanaija. Grace is the Founder of “The University of Wealth” The author of “The Financial Freedom MBA Program”, “The Better Life in Retirement Planning Blueprint” and “The Wealthy Business Blueprint”. Grace is on a mission to shrink the middle class and populate the upper class. She has been featured on BBC Africa. Business Day TV. Inspiration FM. and inside Naijatv. And she consults for Numerous Top Organizations, Company Directors, CEOs, Senior Executives, and High-Income Professionals.
Nairametrics | Company Earnings
Access our Live Feed portal for the latest company earnings as they drop.
- FCMB Group Plc appoints Muibat Ijaiya as Director.
- Afromedia Plc reports a loss after tax of N27.3 million in Q1 2021.
- 2021 Q1 Results: FTN Cocoa Processor Plc reports loss after tax of N162.21 million
- Tantalizers Plc reports a loss after tax of N97.75 million in FY 2020 in Q1 2021.
- Courteville Business Solutions Plc proposes final dividend of 3 kobo per share for FY 2020.