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Investment Tips

Things to consider when investing in shares (Part 1)

Every time you invest in a company by buying its shares, you become a part owner of the said company. Now, investing in shares has so many moving parts. Here, we will break them down.

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Every time you invest in a company by buying its shares, you become a part owner of the said company. Now, investing in shares has so many moving parts. Here, we will break them down.

Stage 1: Determine if investing in shares is okay for you. Before you invest, you must consider these three basic questions:

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1. What’s your investment objective?
2. What’s your risk profile?
3. What’s your investment duration?

What’s your investment objective?: Are you investing for capital appreciation, i.e. to take risks and appreciate your invested capital? Or are you seeking capital preservation, i.e. preserving your invested capital from capital depreciation at all costs?

If your objective is capital preservation, then you should not invest significantly in the stock market. This is because the stock market is extremely risky and you may lose all your invested capital.

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[Read More: How to use profits to determine what stock to buy]

What’s your risk profile?: How much risk are you willing to accept? If your risk tolerance is low, then do not invest in the stock market. Please note: high risk does not automatically translate to higher return.

What’s your investment duration?: All things considered, capital appreciation has a better chance of occurring when you stay invested in the stock market.

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So, if you are younger, you should allocate more of your investment capital to the stock market to take advantage of its capital appreciation benefits. Yes, the risks are higher, but your longer investment duration allows you take that risk.

If you are approaching retirement age, do not invest substantially in the stock market, as you have less time and less margin for error with your investment capital.
Once you answer these questions and decide to proceed, we proceed to the next step.

Stage 2: Understand the difference between the Share Price and Intrinsic Value.

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With shares, it is important to understand the difference between the market price of a stock and Intrinsic value of a stock.
The Share Price is simply what the stock market offers that share to the public for purchase. The Intrinsic Value is what the share is worth, based on fundamentals—both tangible and intangible.

[Read Also: Why Nigeria is presently a risk-off environment]

The intrinsic value and the share price are never the same; its either the share price is at a discount to the intrinsic value (under-priced), or the share price is at a premium to the intrinsic value (overpriced).

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Remember this: So when do you buy shares? You want to buy when the share price is below the intrinsic value of the shares. It’s important to buy shares with a good Margin of Safety, i.e., a good gap between the intrinsic price and the share price.

Stage 3: How do we apply the concept of Share Price and Intrinsic Value?

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Let’s look at the share price first. If Company A has a share price of N100, what does it mean? It means that N100 equals the present value of all future dividends which the investor will get. To be very simplistic, if you buy Company A’s shares for N100, you will get back dividends, if we discount all those dividends back to today, the dividends will be worth N100.

Now, what if Company A gets a huge new contract next week? its revenue will go up, thus the potential dividends will go up (all things being equal), thus the intrinsic value goes up. But remember that the share price is still N100. This makes it a good buy opportunity. If I buy at N100 today, I am in play to receive more dividends. The market will later recognize this and the price of the share will go up to say N110, but I already bought at N100.

What if the company gets a new huge competitor? The revenue may go down, causing intrinsic value to fall, but share prices is still N100. So I can consider selling.

Let’s summarise: If future earnings are projected to fall, then the share price will eventually fall. This means that the stock is overpriced now, so you should not buy or sell. If future earnings are projected to rise, then the share price will eventually rise; so the stock is under-priced now, and you should buy now, or don’t sell.

Note: we have not discussed how to determine the Fundamental Value of Company A. Let’s do that next week.

Patricia
5 Comments

5 Comments

  1. Ese

    April 30, 2019 at 12:16 pm

    Thanks for sharing, Kalu Aja. Its very enlightening.

  2. Brian

    April 30, 2019 at 9:12 pm

    This is intriguing! It’ll probably be the best article I’ll read today on Nairametrics.

  3. Elizabeth Jonathan

    May 1, 2019 at 6:01 am

    This is good information, thanks for sharing

  4. Gideon

    May 1, 2019 at 10:39 pm

    Tanx for d info.

  5. Eses

    October 29, 2019 at 10:01 pm

    Thanks for sharing, i have been looking for how to get knowledge on shares before now but yours is just timely and easy to comprehend

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Investment Tips

What bad stocks have in common with bitter relationships 

The feeling you get from marrying the wrong partner is similar to that felt after buying the wrong stocks.

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I have always argued that stocks cannot be summarised into one statement for a newbie, until recently when a friend told me that it could.  

“Simply put, buying stocks can be likened to relationships, he said.  

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did not immediately agreebut over the next few minutes, he explained to me what he meant, and drew several analogies to back his claims.  

While he is no expert, I understand that he has drawn his conclusion from his experience buying stocks for himself over the past 5 years, so I took his points seriously. These points have been summarised in this article. 

READ MORE: Cocoa prices melt lower as COVID-19 weakens demand 

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When it crashes, there is no telling how far it can go  

My friend mentioned of some company’s stock he bought in 2016 in the hope of selling short-term. At the time he bought, there was a dip and he expected things to pick up within some months so he could sell-off.  

Two years later, the stock price had plummeted 50% down from the price at which he bought. Without saying, he became a long-term investor because he was not ready to sell off at a loss.  

 

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How does this liken to being in a bad relationship?

As the value plummets, you keep hoping it will rise again and then before you know it you are stuck for the long haul. Same thing can happen with a wrong partner. You remain there hoping things will be better but it gets worse. 

It could happen sometimes that a company’s stock market price comes crashing and it never goes back to where it was againThe factors which triggered its fall, may not even be able to return it to its starting price.  

 

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The stock price is not indicative of the company’s profitability 

For some reason, there are company stocks market prices that remain low year after year despite the billions declared in profits, and the dividends paid out to shareholders.  

Sometimes, the stock market price could still slump even when the company has positive records in its financials. Market experts are not always able to explain this, but it remains true. Some of the most profitable stocks are undervalued.  

 

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You can never take stocks at face value

That a stock has been on an upward trend in the last few months does not mean it will remain so. One must always consider several other factors before purchasing a stock.  

While it is important to look at past performance, there are other things that could point to the likely future of such stocks. 

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Say, for instance, the company has just announced a new board chairman who was implicated in some fraud cases in the past. It doesn’t matter how well the stocks have performed in the last 365 days, or the chairman’s competence, the stock prices are most likely to slump due to loss of investor confidence.  

There was a recent case where the CEO of an internet service provider company was alleged to have been involved in sexual harassment, and was eventually pressured by shareholders to resign. The pressure came not necessarily because they thought he was guilty, but because of the implications on the company.  

You have to probe to discover the real qualities.  

 

The most expensive stocks are not necessarily the best. 

If you ever heard a stock described as under-priced or over-valued, then you should understand that the price you pay is not necessarily suggestive of the value.  

Some great stocks, with good potentials, high liquidity, good company profile and adherence to corporate governance ethics, are not as expensive as they should be. While some other stocks are ridiculously overpriced, even when they do not have as much promise. Some of these overpriced stocks could still be basking in past glory or just positive media hype.  

This explains why investors must conduct due diligence before putting in their hard-earned money. Sometimes the media hype around a company’s stock might not be giving you all the information you need to make a decision, so you necessarily have to go the extra mile.  

Subscribe to newsletters from financial news websites if you need to, take courses if you have to, but ensure to learn all you can.  

Remember price is what you pay for the stock, but value is what it is really worth, and there is no law stating that one must justify the other.  

READ MORE: Global stocks records astronomical gains in Q2 2020

When you get the wrong stocks, you get stuck! 

You know that feeling when you are sure that you have made the wrong choice, but also know that there is no way out? That’s the feeling you get when you marry the wrong partner, as my friend said. And that’s the same feeling you get when you get the wrong stocks.  

You simply get stuck.  

No returns. No dividends. Probably, no way to sell either because no one else is interested in buying from you. And if you do succeed in selling off at this point, you would most likely be doing so at a loss.  

If you study trends in the stock market, you will see some dormant stocks that have remained stagnant for long periods of time. No rise in share price, no fall in share price, and no share is being traded either.  

READ ALSO: Best time to make money trading BTCs

It is not a nice position to be in, and that is why you want to be sure of the company, its management, and board members who take the decisions before you decide to buy or not, even more so when you are a long-term investor.  

And even then, with the wrong stocks, you could suddenly find that your proposed short term investment of 6 months will run into years because you keep waiting for things to pick up before you sell.  

Patricia
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Investment Tips

Where to invest using PE, PEG

Investors should always look at the sector P.E. and compare that with individual stock P.E.

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Uncertainty strengthened as foreign portfolio investors pull out funds, chess board

Assuming, you the investor is interested in buying shares in the banking space, you have about 100,000 to invest and you want to buy the best stock that will give you the greatest return at the lowest price. You have two banks in your investment universe; you prefer Bank A and Bank Z. Bank A sells each share for N10 and Bank Z sell each for N5

Table 1.

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Share Market Price N:K
Bank A 10.00
Bank Z 5:00

 

Which would you buy? Well that easy, I would buy Bank A why? because it is cheaper. With N100,000 I can buy more shares of Bank A than Bank Z.

Hold on, not so fast.

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The market price of any stock relates to the expected future earnings of that stock. For instance, Bank A’s share price of N10 means the Present Value of the sum of expected earnings that will accrue to Bank A over the life of earnings is N10. Hence you cannot simply compare the price of Bank A to the price of Bank Z, you must compare Earnings of both banks to determine which is “cheaper”.

READ MORE: Access Bank Plc reports profit of N40.9 billion for Q1 2020

So, to compare earnings, we use a ratio called the Price to Earnings Ratio (P.E.). Earning here is the earnings per share, which means we divide total earning by issued shares. Again, we assume a total of 1m shares issued by both banks. To calculate PE, first get earnings per share, so if bank A posted earnings of 1,000,000, and we have issued shares of 100,000 then Earnings per Share is (1,000,000/100,000) or 10. The P.E. for Bank A would be (10/10) or 1.  A P.E. of 1 means the share price is 1 times the earnings of Bank A, very good. (lower P.E. is preferred). Let’s also assume Bank Z has a P.E of 0.5

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Now if we look at table 2 which now compares prices to earnings, we can see the PE of Bank Z is lower than the PE of Bank A. This means Bank at price of 10 is trading at 1 times its earnings when compared to Bank Z which is trading at o,5 its earning, thus we can say that Bank Z is “cheaper” than Bank A because we are buying at a lower multiple of earnings

Table 2.

Share Market Price N:K P.E. Ratio
Bank A 10 1
Bank Z 5 0.5

 

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READ MORE: Nigerian Stock market records sixth consecutive losses, investors lose N15.55 billion

We can also say that if a company has a high price relative to her earnings, then that company is a Growth Stock.  If, however the price relative to the earnings is lower, then the stock is a Value stock. A high growth sector like IT or biotech will have a faster growth and relatively higher PE ratio than a company in the utility sector with predictable steady earnings growth. Investors should always look at the sector P.E. and compare that with individual stock P.E.

P.E. is known as a trailing ratio because it is based on the past. Company can give forward guidance on earnings and that is used to create a Forward PE ratio. What if we wanted to compare both banks but this time instead of looking at past earning, we want to investigate the future and ask which bank we should buy using expected earnings as our main guide. To do this, we have to input expected earnings into the mix

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Perform advanced finasncial calculations on Nairamterics

Let us assume Bank A is buying a smaller bank, and that will give her more branches, leading to higher growth in the future. Let’s say this will; lead to a 20% growth in earning year by year. Bank Z is not as aggressive and earning will increase, only 10% does this change the current recommendation?

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It does and it introduces us to another ratio called the Price to Earnings Growth Ratio (PEG). The PEG is the P.E. of the Stock of the company divided by the growth rate of its earnings. We have already calculated the P.E. Ratio, so the PEG for Bank A is (1/20) or .05. This is an exceptionally good measure indicating the stock is undervalued. A PEG less than 1 generally means undervalued, more than 1 means overvalue

Patricia
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FEATURED

Top AgriTech deals currently on sale in Nigeria – June 2020

These options were picked from firms known to insure their farms and farm produce.

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Agricultural financing, Top AgriTech deals currently on sale in Nigeria – June 2020

The month of June is coming to an end, but just before it does, Nairametrics is bringing you Agritech deals you should consider investing in. Ordinarily, this is not the best time for AgriTech investments, as the rains have started and most farmers are done planting.

However, there are still some late planting to be done, so this means there are some late deals you can take advantage of. From the details of these deals, you will discover those meant for funds you intend to keep long-term and those for the short-term.

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These options were picked from firms known to insure their farms and farm produce. There are some AgriTech firms that should also be in this list, but this list only captured those which had deals open for sponsors and investors as at the time of writing.

Thrive Agric is quite popular in the Agritech space but as at the time of writing it, there was no farm deal open for sponsorship.

Wealth.ng also has a couple of agricultural investment options, but they have been completely subscribed by the start of June. Only real estate investments and stock options are open.

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READ MORE: The Different Dimensions of Investing in Agro-Tech

Farmcrowdy usually offers a variety of investment options, from maize farms to rice, potatoes, fish, cassava, poultry, cattle, but most of these options have been sold out and closed, after full subscription. Its farms located in Kaduna, Oyo, Ogun, Niger and Lagos states are all insured by Leadway Assurance.

Top AgriTech deals currently on sale in Nigeria – June 2020

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Only one option is still available from Farmcrowdy as at the time of writing.

The Farmcrowdy food gives 10% Return on Investment (ROI) per annum with the minimum holding period of 7 months. The minimum investment is N20,000 being for the sponsorship of one farming unit.

At this rate, an investment of N100,000 would yield another N10,000 by the end of 7 months.

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This investment funds covers the cost of production of several farm produce like potatoes, vegetables, and staple foods, and the farms are located in Lagos state.

Another deal you could consider is the Fish farm investment with Groupfarma. This investment gives 27% ROI. A unit of the fish farm investment can be sponsored at N52,000, and the Oyo based farm runs a nine-month farming cycle. The farm is insured with the Nigerian Agricultural Insurance Corporation (NAIC).


Farmkart also offers a fish farm option but with different terms. You need N100,000 to purchase a unit of this option, with 15% ROI over a period of a 6-month farm cycle. The investment funds cover the farm inputs, the pond rents, organic supplements, payment for the farm workers, insurance and the farm is located in Ijebu-Ode, Ogun state.

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With the Groupfarma option, every N100,000 invested in the fish farm will yield N27,000 at the end of the 9-month cycle, while the same investment with Farmkart will give you a yield of N15,000 in 6 months.

READ MORE: Pig farming is a goldmine in Nigeria- Porkmoney boss

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The choice of investment here would be determined by how long you want the funds to be held.

Top AgriTech deals currently on sale in Nigeria – June 2020

The Federal Government had complained of the millions spent on importation of fish into the country. Worse still, Nigeria has been tagged the largest importer of fish and fishery products in Africa and the world’s fourth largest in volume terms (5.4% of global imports) after China, Japan and the US.

What these figures tell you is that any investment towards improving the aquaculture industry and fish production, has a profitable value chain. So, you might want to consider it among your options.


Payfarmer also offers a Catfish Farms investment where investors can sponsor a unit with N50,000 and expect 20% ROI after the farm cycle of 7 months. This means that N100,000 investment will grow to become N120,000 in 7 months.  The farm is located in Epe, Lagos state.

Payfarmer has a couple other investment options still open as well.

The Payfarmer Pepper Farm investments opens at a unit entry of N25,000 investments and you get 12% returns with a minimum holding duration of 5 months. An investment of N100,000 here would give you additional N12,000, and if you are looking for an investment that frees up your funds just before the yuletide, then this would be a good option to consider. The pepper farm is located in Epe, Lagos.

Payfarmer also has several Pig farm options. The first requires a minimum investment of N5 million naira for a unit and gives you 34% returns with a minimum holding period of 10 months. This means one-unit investment here will yield of N1.7 million at the end of 10 months.

READ MORE: Invest and earn 300%: How scammers came after me

There is also another Pig farm option which allows an entry investment of N250,000 for a unit, giving you 28% ROI in 10 months. Every N1 million invested in this farm will earn a profit of N280,000 at the end of the cycle.

Top AgriTech deals currently on sale in Nigeria – June 2020

The third Pig farm option has a unit investment of N500,000 with a 30% return and a 10 months farm cycle. An investment of N1 million here earns N300,000 at the end of 10 months.

The fourth Pig Farm option allows a minimum of N1 million for a unit and gives you 32% returns in 10 months.

All of these pig farms are located in Epe Lagos. Again, it comes down to the investor’s choice and availability of funds.


Farmfunded is another popular name in the space and even though most of its plans are sold out, there is one still open.

The integrated rice mill financing offers impressive returns but, it is strictly for investors who have funds to hold in the long-term. Because the company is trying to increase rice production capacity in Nigeria all investments have to be held for a minimum period of 24 months at the end of which the investors get 80% returns.

To make things easier, the investor may or may not cash out his 10% returns every quarter (3 months) but will not have access to the capital until after 24 months. This ensures that the farms have a stable capital base to grow and expand over the next 2 years. The thousands of acres of land to be used for these are located in Kano State Nigeria.

READ MORE: KIAKIA Peer-to-Peer lending investment app (Review)

If you have N100,000 to purchase a unit, and you decide to wait till the end of the 24 months period, you would be receiving a profit of N80,000 and a total of N180,000.  The profit is not compound, so even if you don’t take your profit, it does not form a part of your investment.

The farm is located in Kano state and allows investors to provide funds which will be committed into the procurement of milling machine, and processing of paddy rice to premium parboiled rice. Considering the gap between local production and actual demand for rice, this looks like a solid investment plan.

The company has also sought to protect its base by ensuring that investors may cash out their profits, but not the base investment, so that it can be ploughed in again for the next cycle.

Note, however, that whatever your choice of investment, you should consider the holding period as against when you would need to liquidate your investments. The crux of the deals offered is to engage your idle funds and help them grow while you continue your hustle.

On SEC: Last May, The Securities and Exchange Commission (SEC) proposed a new set of rules that will regulate crowdfunding businesses and deepen the capital market in Nigeria. This includes AgriTech firms like those listed above. The commission plans to regulate the crowdfunding business in Nigeria in order to reduce the risks associated with it for investors and financiers.

Disclaimer: This is not an investment advice or guide as Nairametrics is not affiliated to and cannot vouch for any of the AgriTech firms listed above. Kindly do your due diligence before investing.

 

Patricia
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