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.
Proxy Voting: Making Your Voice Heard Inspite of COVID-19
Proxy voting is a process where one person chooses another to represent him or her in casting a vote on his or her behalf.
One of the privileges of owning shares in a company is the ability to attend the shareholders’ meetings and vote on important issues about the company. In most cases, such issues touch on dividend declaration, election and/or reelection of directors, authorization to fix independent auditors’ remunerations, and the election of members of the audit committee, among others.
It has been observed that shareholders love to attend such annual general meetings in person for the pride of place it provides, as well as the social status it bequeaths to the attendees in addition to the souvenirs they receive during such meetings.
Unfortunately, that era of a social event involving the physical gathering of shareholders seems to be going extinct, thanks to COVID-19. However, in spite of the devastating effects of COVID-19, and the changes it is bringing to our social life, shareholders can still make their voices heard during non-physical shareholders’ or annual general meetings. This they can do using proxy votes.
What is Proxy Voting: Proxy voting is a process where one person chooses another to represent him or her in casting a vote on his or her behalf. Proxy voting has not been more important than in the present COVID-19 times. In reaction to the pandemic, proxy voting is being used in areas outside corporate governance. For example, the US House of Representatives is pushing for proxy voting as a means of getting things done in the house. In a proposal released by the House Speaker, Nancy Pelosi, US lawmakers would be allowed to cast votes for their colleagues who are not in the Capitol in person. That underscores the advantage and the increasing importance of proxy voting.
Nigerian Companies and Proxy Votes: Proxy voting is not new in Nigeria, especially among Nigerian companies. Whether it has been effectively used or taken advantage of is another question. However, Nigeria’s Corporate Affairs Commission (CAC) has been proactive and forthright in its quest to ensure that companies in Nigeria and Nigerian shareholders alike, take advantage of the proxy voting process in keeping with the social distancing rules put in place by various governments to curb the menacing COVID-19. The CAC has therefore asked companies to take advantage of “S.230 CAMA on the use of proxies in holding their Annual General Meetings.”
In line with the availability of the proxy voting process as a way to give every shareholder a voice and the encouragement and enablement from the CAC, many companies in Nigeria are complying with the advice. A visit to the website of the Nigeria Stock Exchange indicates that all the 30 companies that notified the public about their annual general meetings via the Nigeria Stock Exchange, since April 1, 2020, included notices or indications of the need for proxy votes in such notifications. Many of them even included links to live-stream the events, for those who would like to participate online.
Brace for Change: There is no doubt that COVID-19 has changed and will continue to change the way certain things are done. From the look of things, proxy voting may become the new normal in corporate governance and conduct of shareholders Annual General Meetings.
Shareholders, big and small, should start getting used to voting by proxy, especially those who have not been doing so in the past. It is only by so doing that you will make your voice heard, in the affairs of the company in which you have worked so hard to invest in.
7 common money mistakes I made and why you should avoid them
Don’t plan your wedding with the hope that your uncle will foot the bill. It is setting yourself up for frustration. Uncle also has his money issues that you have no clue about.
On Sunday, March 17th, 2020, Nairametrics Founder, Ugodre Obi-Chukwu, tweeted a question that has over time garnered more than seven hundred interesting responses. His question was about debt and it was straight to the point —”What was the most amount you lent out to someone and never got paid back?”
What’s the most amount you lent out to someone and never got paid back?
Mine is N550k and it’s still paining me till today.
— Ugodre (@ugodre) May 17, 2020
As you can expect with this type of question, the responses were varied and highly personal. The Twitter thread also proved one thing, and that is the fact that banks are not alone when it comes to bad debts. One of those whose responses stood out for this author is Gabriel Omin, a personal finance enthusiast. Interestingly, Mr Omin had earlier written extensively about the 7 money mistakes he made in the past, and lending is atop his list. See below.
Never Ever Lend Money Kept In Your Custody.
There is a reason you were chosen to keep the money. People do not joke with their money and so they carefully choose who keeps corporate funds. Even thieves chose trusted people to keep their money.
When you betray the trust of people for whatsoever reason, you’ve soiled your name. You will lose social capital, which is a very important capital (this is one of those, not everything that counts that can be counted). That is very hard to undo. Whatsoever happened, it’ll be hard for people to forget. My dad will not touch the original money that is given to him to keep. If you numbered your money, you will get it back the same way. Basically, you will get the same notes you gave him to keep except he took the money to the bank.
I learned this the hard way. A friend of a friend came with a need. He told me he had funds in the bank but it did not clear and the next day was a public holiday (this was pre-online banking). I loaned him money that someone gave me to keep. The person who gave me the money to keep, trusted me to the extent that he refused to sign a contract with me because he trusted me. I was supposed to get the money on the next working day, from the friend of a friend. Till today the next working day nefa reach. I had to go to the guy who gave me the money to keep for him, spoke a lot of English and paid back though I missed the day we earlier agreed. It was sad but I learned the hard way.
Avoid Impulse & Unplanned Expenses.
No budget, no spend. Spending without a budget is misappropriation. It doesn’t apply only to politicians. Have a budget & stay on it. This is the epitome of discipline. People will say what they want to say but instilling financial discipline is more important. A budget creates boundaries. Without a budget, you are on the speed lane to debt and debt…s/he is cruel. Plan plan plan. There might be surprises but a plan keeps you in order. It helps you know where you have detoured. You must not buy every AsoEbi. ATM cards are sweet to swipe but hard on the balance.
One of the ways to avoid impulse buying is to hold cash. Yes. It sounds not- so-tech in a tech age but believes me it works. When the cash is finished, it is finished. Sitting down in one place also helps. Yes o. The more the outing, the more the expense. I can feel the envy I am generating with this but na so e bi.
The Money Will Come.
You are old enough now to know that the money will not always come. Things happen. Have a buffer for emergencies. The difference between politicians & business people is that politicians do not understand why the money should not come. Business people work for money. They know that you have to make it happen. Stop planning your expense based on the generosity of strangers.
Spending Based On Other People’s Purse.
Don’t plan your wedding with the hope that your uncle will foot the bill. It is setting yourself up for frustration. Uncle also has his money issues that you have no clue about. Don’t plan to fly business class with the hope that someone else will pay. You are not on welfare. Even if you are on welfare, please bring something to the table. That something is humility.
Responsible people spend within their means. They may not have Rolexes or iPhones but they hardly ask for help on predictable things like house rent, school fees, etc. It takes 9 months to have a baby. It is not an emergency; plan for it. I take God beg you; plan.
Your kids should be in schools that you can afford. People have come to me for fees of school that my kids cannot even attend. I once headed a scholarship board and we set our requirements from day one. But parents kept coming for help in schools that they cannot afford. I mean households that both parents were not earning any income. You see what I mean by the fact that you have to contribute humility when you come to the welfare board?
Don’t buy with the hope that someone else will pick the bill. Try and agree upfront for a joint transaction. For the fact that someone paid upfront might mean that s/he expects repayment. Don’t think s/he is wicked when repayment is expected and asked for. In joint transactions, always think of going Dutch except you are advised otherwise. Err on the side of caution.
Spending Money Before It Gets To You.
Things happen. Until money enters your account, don’t go & pick something with the hope that you will pay when you get the money. That habit will lead you into the red. How about if that money does not come at the end of the day? I try not to make promises to people based on expected money. I see people start piling up debt just because they got a new job. It will distort your balance sheet if you start that way. It never ends well.
Money Sent Me On Errand.
I have seen people who were given a raise, upgrade their lifestyle in a heartbeat. Fly business class by the next day. Buy an expensive toy they never planned for. This is what happens to lottery winners. They pursue the appearance of wealth. The appearance of wealth is demonstrated when you get those things that make it look like you’ve arrived. It is the reason people take pictures sitting on cars; same reason musicians record videos in mansions and nice cars and private jets. Gang stars wear fur coats. Same when people buy TV/stereo set/gadgets with their first salary. Always allow the money to cool down. Take out time to plan what to do afterward. I have a one month rule for windfalls. They stay in the account until such a time that I have decided the way forward.
Depending on the Generosity of Strangers.
This is living life with the hope that somehow someone else will show up in the nick of time to pick your bills. It leads to living in debt and hoping that those you are indebted to will forget the money. These people can come to you with their family to thank you for the debt forgiveness you have rendered them. Meanwhile, you have said nothing of such. They always convert their debt into forgiven loans by themselves without your consent. They are experts at this. They quarrel and get contentious if you do not forgive. Money problems abound.
So, next time you think of doing any of these, have a rethink.
A New Wave: Where to Invest in H2 2020
Some of the industries that are expected to succeed given the changing times are not your usual kinds of investments.
There are two kinds of people in the world: The ‘glass-half-empty’ kind, and the ‘glass-half-full’ people. Where some see problems, others see the opportunities – same glass, but different perspectives. 2020 might have left very little hope to hang on to, but the world is still in motion.
Amidst the chaos, many have found their diamonds in the rubble – and many more will. These people, however, will be those who are willing to adapt to the changing times by repositioning themselves to leverage the opportunities that arise.
The Covid-19 pandemic has proven to be a holistic challenge, bringing to the fore a myriad of issues. It has caused a dent in the revenue/ disposable income of many businesses and individuals alike, shaken the very balance of the economy with many countries heading for unprecedented recessions, and left everyone with so much uncertainty.
Yet, we are at the cusp of a new dawn. Processes are changing, new industries are emerging, and money is changing hands. Flexibility, automation, and sustainability are just some of the words that will make all the difference in the world of business.
Dr. Ola Orekunrin Brown, the founder of Flying Doctors – a healthcare investment company – had, at the Quarterly Economic Outlook Webinar hosted by Nairametrics, offered insights into some of the industries that are expected to succeed given the changing times, and they have been outlined below. But be warned, a lot of them are not your usual kinds of investments.
Investment opportunities to leverage in H2 2020
One of the many trends that emerged in recent times, as a result of the Covid-19 pandemic induced lockdown in many parts of the world, is a huge dependence on internet technology and digital media. Everybody went indoors – and online. The entertainment sector found its home on social media through Instagram Live parties, Tik Tok, and the Houseparty App.
Companies went online as well, leveraging digital technology like Zoom, Microsoft Teams, and Slack. Even the lifestyle industry went online with online gym classes, yoga classes, and even karate classes. Not only have they provided much-needed solutions, they have also come with the additional benefit of convenience.
A good example of this is Eric Yuan, the founder of Zoom, who joined Forbes’ billionaires’ list for the first time as a result of the increased use of Zoom for work meetings. Apptopia, an App tracking firm, reveals that Zoom was downloaded 2.13 million times around the world on 23 March, the day the lockdown was announced in the UK– up from 56,000 a day and two months earlier.
Another feature of the digital economy lies in the education sector. With schools forcefully closed, classes have had to go online. Online courses, training workshops, and even full degrees will become more normal as those who work from home will see these online education courses as an opportunity to develop themselves with little effort.
Investments here will be even more fostered by access to international markets, thereby increasing the market size. ResearchAndMarkets predicts that the online education market is poised to grow by $247.46 billion during 2020-2024, progressing at a CAGR of 18% during the forecast period.
Institutions that are too big to fail
The stock market is expected to be even more volatile, given the overall unfavourable economic terrain and a high level of uncertainty – especially with all the talks of a recession coming. In H1 2020, the more favourable companies to invest in are those that have stood the test of time – the stocks that are too big to fail.
Many of these stocks have been in existence for decades and have been able to attain a level of stability as a result of their large market share and stable structures. You want financially strong companies and the reason is not far-fetched; the goal is to put your money behind the companies that are strong enough to withstand the storm to a good extent.
Another by-product of the Covid-19 induced lockdown is the increased need for internet services. Dr. Ola explains that the use of the internet as well as the move to work-from-home, are some of the megatrends of the times.
Good internet connectivity has proven to be the lifeblood that keeps digital entertainment trends, digital work trends, digital lifestyle trends, digital entertainment trends, and a huge chunk of the communication we have today. As a result of this, companies in the telecommunication industry have begun experiencing growth in revenue and earnings. Investments in this sector will most probably be worth your while.
Distribution & E-commerce
When the Okada ban took place, several motorcycle companies that were affected were forced to pivot from transporting people to moving items as full-scale delivery businesses. While many might have thought that a bad idea, the lockdown has undoubtedly contributed to the development of this industry.
The e-commerce industry is also expected to thrive with trade moving predominantly to the internet. Investments in distribution companies and e-commerce businesses are also expected to be worth your while.
One of the major hits of the pandemic is the Nigerian foreign exchange market which has now become highly volatile. The demand for the dollar far outweighs the available supply and this has forced importers and speculators alike to scramble for what is available in circulation.
Given the challenges with the FX market, international spending on foreign denominated expenses like tuition fees or international loans will come at an increased cost. To mitigate foreign exchange loss challenges, investments in USD denominated equities, and Eurobond funds will help you withstand the storm. While gains here could have you betting against the Naira, having foreign investments in your investment portfolio will come in handy.
The Agricultural industry is an expected gainer. One of the reasons for this is that local supply chains will expand, given the restrictions on the global supply chain as a result of the lockdown and the border closure. While this will also thrive, Dr. Ola Brown, explains that jobs will only be created in the short term.
This is because fewer hands will be required as productivity, better processes, and mechanization systems increase. An example of this is the new trend of robot herders in the United States. This is even more so as we compete with the rest of the world in production. Needless to say, Agriculture will always exist, given the need for food, as well as the rising global population.
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While the Covid-19 pandemic has a direct impact on the healthcare industry, the industry is a complex one. The first reason for this is that, with the healthcare infrastructure deficit in Nigeria, the government will need to invest in it to provide wide access.
With subsidies on healthcare, the free market in terms of investments might not be as lucrative with more people opting for government healthcare. However, given increased investments in the sector and the move to preventive health practices, the industry remains attractive.
For more detailed investment opportunities with specific stocks in the Nigerian Stock Market, sign up for the Nairametrics Stock Select Newsletter.