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Financial Literacy

How Not To Invest In Shares

How Not To Invest In Shares

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Meet Bright, the “intrepid” investor

 Bright thought it was time to get into the stock market business and decided to open an account with a stockbroker. He quickly asked for a list of stocks that he could buy and then sell for “huge” profits as quickly as possible.

The following six months were like a roller coaster ride as he entered and exited stocks at will and without fear. How in this world had he missed this “business”? After all, all he needed to do was to buy a stock and then sell as soon as the price appreciated to his sell target. He hardly knew the companies he was buying, or what they even did to make money.

READ: Nigeria’s billionaires lose over N500 billion to stock market dip

Many get into the stock market with this sort of mindset. While many make money this way, they often times fail and when they do, they do so, woefully. The stock market is erroneously seen by many as a place to stake bets without understanding the underlying principles behind how it works.

READ: These are what your pension contributions are used for

Types of investment principles & investors

Just like in other businesses, investing in the stock market requires that you understand which principles work best for you, and stick to them.

Growth and Value Investors are perhaps the two most popular types of investors in the world, along with their respective principles.

[Read Also: A guide to how Mutual Funds work in Nigeria]

Growth Investor: Growth investors are predominantly interested in high growth companies. They believe companies that have the potentials to grow very fast present the best opportunities for them to increase their returns on investments.

 Most growth investors rely on technical analysis, basically the study of share behaviour with the aim of anticipating future movements. They rely on charts and other aspects of share activity to predict how share prices would swing.

They, therefore, lay a lot of emphasis on seeking out stocks with potentials to increase their share prices within the shortest possible time. Growth stocks also have very high P.E ratios of 25x and above, as the market places a very high premium on their share prices.

Growth stocks also report high revenue growth, even if they are not commensurate with profits. They grow their revenues by over 100% annually and sell products or services that are eye-catching and fairly new in the market.

[READ MORE: Infrastructure: Tapping into pension fund – a step in the right direction?

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Value Investor: Value investors seek out stocks with high intrinsic values, often higher than the market prices that they are sold for. They like to buy stocks that are perceived to be undervalued, believing that very soon, the market would recognize their true values and then price the stocks accordingly.

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READ: The quickest ways to save money at the grocery store

They can be very patient and unlike the growth investors, prefer stocks with lower P.E ratios (often single digits). In seeking out these value stocks, they rely on fundamental analysis, a method that relies on the financial statement of a company, its management, competitive advantage and ability to outsell its competitors in deciding whether to buy shares in a company. This is a painstaking technique and requires countless man-hours, poring through financial statements and researching the company behind a stock.

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Which is better?

There have been different researches as to which investing method provides the best investment results over the years. Some even utilize a hybrid of the two with very impressive results.

Choosing between the two depends on your strengths and ability to make the right decisions by relying on either or both.

[Read Also: Nigeria’s real estate industry attracts foreign investors ]

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What shouldn’t you do?

Speculation: What you should thus avoid is buying shares like you are gambling. Even people who rely on technical analyses spend a lot of time analyzing trends and movements in stocks to determine when they buy, sell, or hold. You should therefore not buy shares in a company because everyone else is buying (herd mentality) or simply because someone recommended it to you.

READ: Quick tips to build a thriving business overseas

Many who speculate in share investment claim that it is very profitable, however, what they probably won’t tell you is that it is also the fastest way to lose money. You can lose all that you have made during a year-long’s bullish spree in a matter of days.

Margin Lending: This is basically borrowing money from the bank to invest in shares which should also be discouraged if you do not dedicate at least 90% of your business time in investing in shares. It is a sure way of getting bankrupt.

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READ: Emefiele tells economists to stop “overdramatizing” analysis that can create Panic

When you invest in shares, you have basically taken a decision to buy a part of a company. Even when a friend offers his car for sale, apart from negotiating a price, you go ahead to test drive the car and ask your mechanic to check its condition. If you can take that much time in deciding whether to buy a car or not, then why not do same for shares?

You must understand the company you are investing in and what it does. Find out who members of the management team are and review their competencies. Ask yourself if what they sell is something you will like to buy.

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

Back to Bright…

Bright ended up losing nearly all his investments in the ensuing stock market crash of 2015, as he knew little of most of the companies that he had bought shares in. Stocks he bought at N2 per share have remained at the rock bottom price of 50 kobo per share, years after.

READ: Stellar’s XLM on a big bang, up by 10%

This article first appeared on Nairametrics on March 24, 2014.

Nairametrics is Nigeria's top business news and financial analysis website. We focus on providing resources that help small businesses and retail investors make better investing decisions. Nairametrics is updated daily by a team of professionals. Post updated as "Nairametrics" are published by our Editorial Board.

7 Comments

7 Comments

  1. Anonymous

    July 23, 2018 at 11:54 am

    Can you in posts like this give examples of company/companies whose stock fall in these categories (value or growth stock). Thank you for the write up

  2. godswill

    August 3, 2018 at 8:40 pm

    if i want to invest in stock, how will i start?

    • Onome Ohwovoriole

      August 6, 2018 at 8:43 am

      You would have to open an account with a stockbroker. You can get a list of registered stockbrokers at sec.gov.ng

  3. Startupback

    January 28, 2019 at 8:17 pm

    Would you still advise someone to invest in Nigerian stocks this 2019?

    • Stanley

      September 23, 2019 at 10:25 am

      I will advise you seek out the value stocks as per the article. Most stocks including value stocks are currently available at discounted prices due to the low level of economic activity in the country which is also discouraging many foreign and local investors. Some companies are still producing good results, paying dividends consistently despite the poor perception of the market, hence identifying such value stocks and buying them now is not a bad idea. But you should be very patient. And content yourself with dividends for now. But surely, with time, optimism will return to the market and those value shares will be the ones many investors will go for the most , resulting in a rally and capital appreciation for those patient dogs who had bought during the downturn.

  4. Douye otoworo

    February 5, 2020 at 5:47 am

    Axa mansard insurance company,is it a good insurance company and can it be used for a long term investment.

  5. Adetuberu Yinka

    February 24, 2020 at 7:42 am

    My challenge is how does one obtain metrics like forecast eps growth, forward p.e ratio, hence peg and other important growth valuation metrics for all the stocks on the board  without stress if I want to follow a growth investing strategy. Many equity reports i have read automatically assume value approach  calculating intrinsic value through dcf.I will appreciate direction.
    Thanks .Adetuberu Yinka 

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Personal Finance

5C’s of creditworthiness: What lenders, Investors look for in a business plan

Business owners need to be aware of the criteria lenders and investors use when evaluating the creditworthiness of entrepreneurs seeking financing.

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Five things to consider before securing a loan

Banks usually are not a new venture’s sole source of capital because a bank’s return is limited by the interest rate it negotiates, but its risk could be the entire amount of the loan if the new business fails. Once a business is operational and has an established financial track record, banks become a regular source of financing.

For this reason, the small business owner needs to be aware of the criteria lenders and investors use when evaluating the creditworthiness of entrepreneurs seeking financing.

Will the business that an entrepreneur actually creates look exactly like the company described in the business plan? Of course, not.

The real value in preparing a business plan is not so much in the finished document itself but in the process it goes through – a process in which the entrepreneur learns how to compete successfully in the marketplace. In addition, a solid plan is essential to raising the capital needed to start a business; lenders and investors demand it.

Lenders and investors refer to these criteria as the five C’s of credit.

READ: 5 ways to raise funding for your business

1. Capital: A small business must have a stable income base before any lender is willing to grant a loan. Otherwise, the lender would not be making, in effect, a capital investment in the business. Most banks refuse to make loans that are capital investment because the potential for return on the investment is limited strictly on the interest on the loan, and the potential loss would probably exceed the reward. In addition, the most common reasons that banks give for rejecting small business loan applications are undercapitalization or too much debt. Banks expect a small company to have an equity base investment by the owner(s) that will help support the venture during times of financial strain, which are common during the start-up and growth phases of a business. Lenders and investors see capital as a risk-sharing strategy with entrepreneurs.

2. Capacity: A synonym for capital is cash flow. Lenders and investors must be convinced of the firm’s ability to meet its regular financial obligation and to repay loans, and that takes cash. More small businesses fail from lack of cash than from lack of profit. It is possible for a company to be showing a profit and still have no cash – that is, to be bankrupt. Lenders expect small businesses to pass the test of liquidity, especially for short term loans. Potential lenders and investors examine closely a small company’s cash flow position to decide whether it has the capacity necessary to survive until it can sustain itself.

READ: How to scale as a small business on a budget

3. Collateral: Collateral includes any asset an entrepreneur pledges to a lender as security for repayment of a loan. If the company defaults on a loan, the lender has the right to sell the collateral and use the proceeds to satisfy the loan. Typically, banks make much unsecured loans (those not backed up by collateral) to business start-ups. Bankers view the entrepreneurs’ willingness to pledge collateral (personal or business assets) as an indication of their dedication to making the venture a success. A sound business plan can improve a banker’s attitude towards venture.

4. Character: Before extending a loan or making an investment in a small business, lenders and investors must be satisfied with an entrepreneur’s character. The evaluation of character frequently is based on intangible factors such as honesty, integrity, competence, polish, determination, intelligence, and ability. Although the qualities judged are abstract, this evaluation plays a critical role in the decision to put money into a business or not.

READ: 7 Ways to pay for your higher education

5. Conditions: The conditions surrounding a funding request also affects an entrepreneur’s chances of receiving financing. Lenders and investors consider factors relating to a business’ operation such as potential growth in the market, competition, location, strength, weakness, opportunities and threats. Another important condition influencing the banks is the shape of the overall economy, including interest rate levels, inflation rate, and demand for money. Although these factors are beyond an entrepreneur’s control, they still are an important component in a banker’s decision.

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The higher a smaller business scores on the five C’s, the greater its chances of receiving a loan.

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Written by Chukwuma Aguwa

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Personal Finance

Don’t be fooled by COVID-related scams

Always consult the institution in charge of health-related matters to confirm any fishy information you come across.

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The nature of and the manifestation of the Covid-19 disease is such that there’s only a little time available to remedy the situation before it gets chronic. Although the infection begins by exhibiting mild symptoms, if you do nothing in a short time, it could lead to death in a matter of days.

This whole picture has caused many to become desperate about Covid-related issues, launching into panic mode at the sight of any information. As a result, such people are not far away from falling for fraudsters.

With the different kinds of news flying around, you mustn’t be fooled by Covid-related scams.

The Coronavirus threatens the health of millions of people around the world daily, also killing thousands along the way. To curb the spread and remedy the situation, bodies like the CDC, WHO, and every country’s local health organisation like the NCDC, frequently circulate information around communities. However, it has also led to fraudsters taking advantage to provide fake news, and even asking for donations.

Each day, there seems to be a new account or NGO asking for donations into the health sector, and though some are legit, many are just fraudsters posing to take advantage of innocent citizens. So far, numerous complaints about scams have been recorded, especially with people who are looking to support the health cause in any way they can.

READ: Africa to spend $9 billion on Covid-19 vaccine, access to supply is big problem

Channels used for COVID-related scams 

There are three major ways scammers take advantage of the haziness of the situation to dupe people. To start with, they appeal to the emotions of humans, who see the high death toll and suffering. As a result of what is happening, people have been willing to donate funds for medical supplies, isolation centres, and financial compensation for medical workers.

Scammers take advantage of this by posing as charity organisations and solicit for funds. Most times, as soon as their target is met, they clear their footprint without leaving a trace behind.

Another way they scam people is by manufacturing and selling fake or low-quality health products. Everyone wants to get their hands on a cure, or something that can at least protect them from the virus, and scammers are meeting their needs by providing just that.

READ: China joins WHO vaccine programme as it fills huge gap left by United States

The World Health Organization currently approves only one vaccine, and any other thing outside it is outrightly fake or just a supplement that will help your body. Currently, only the Pfizer vaccine is clinically tested and approved to work. Be sure to not throw your money in the wind by purchasing some of these fake drugs around.

Lastly, scammers create systems to extract a patient’s personal information, thereby having access to the person’s true identity. It could be in the simple form of opening a registration portal where you supply all your details.

Therefore, only give information to approved bodies and not any random online site that appears legit. These fraudulent individuals can do a lot of damage to your identity. Stay vigilant, only communicate with approved bodies, and always ask questions if you are not sure or suspect foul play.

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The place of electronics in COVID-related scams

These fraudsters usually reach out to you through the digital sphere. Hence, watch out for cold calls, text messages, or emails requesting donations to certain bodies. The best way to confirm the legitimacy of such a message is to visit the organisation’s official website in a different browser. Never follow the link in the mail or text directly, as it can be easily embedded with spyware. Therefore, a single click could see them extract all your personal information, including bank details.

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Also, please stay away from those who claim to have a cure, and accompany it with testimonies of people who have used it. They are low graders desperate for your money. Vet them by searching online and see what people are saying. In all, always look out for suspicious messages, and opt out if you are sceptical.

In a nutshell, you should not believe any cure, vaccine or supplement that the World Health Organization does not approve of.

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Conclusion

The government or legit health institutions do not cold call citizens to request donations or coerce them into making one. If you receive a call out of the blues, chances are it’s a scam, which is why they mostly try to hurry you to donate before you realise it. Always consult the institution in charge of health-related matters to confirm any fishy information you come across.

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