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
|Share||Market Price N:K|
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.
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”.
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
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
|Share||Market Price N:K||P.E. Ratio|
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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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?
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
Where to invest $10,000 right now
Entrepreneurs, financial experts and investment analysts suggest what sectors or assets to invest in if you have $10,000.
The upsurge in COVID-19 cases around the world has kept global investors flocking the world’s safe-haven currency at an exponential rate, the high demand for the greenback is coming on the high geopolitical uncertainty prevailing in today’s financial market.
Also, it’s important to note at the currency market, the U.S dollar remains king. According to the International Standards Organization, 90% of currency trading done globally involves the U.S. dollar, most crypto assets, virtually the most liquid commodities are priced in the U.S dollar not forgetting about 40% of the world’s debt is dominated in the greenback.
So Nairametrics felt it paramount to ask a hedge fund manager, entrepreneurs, and financial experts, about what sectors or assets they would invest in if they had, say, $10,000.
Their responses were revealing and diverse as they were varied—ranging from; buying global equities, local stocks, real estate holdings to investing in digital assets.
Gavin Smith, veteran trader, and managing partner at Panxora Crypto Hedge Funds.
I would scale into BTC $2,000 now, $2,000 when it comes off to $10,000, then add $2,000 at $9,000 and another $2,000 at the $8,000 level. If BTC then breaks above $13,000 I would buy any of the above orders that had not been filled of the remaining $2,000. I would put $500 into each of these four DeFi protocols: LINK, COMP, KNC, and OMG.”
DeFi is an exceptionally volatile market and these would need active management, but they represent an opportunity with exceptional upside potential. This is a market our analysts are building a profile in, to advance our DeFi hedge fund later in the year.
Debo Adejana – Founder, MD/CEO – Realty Point Limited.
I follow the investment wisdom that says, ‘invest in what you know and understand’. I know and understand real estate probably more than any other investment asset class.
So, the decision as per what I will invest in with $10,000 which should be upwards of N4m is simply; Real Estate. I will either do rental income property as part of a properly organized shared-ownership structure or speculate on land depending on how much time I have with the money. The reasons are very basic, real estate investments have been known to survive and surpass any and every challenge.”
Darlington-Morsi Onyemaka, Co-founder Quba Exchange Forbes Accelerator Cohort ’20.
One of the main pointers to a good investment portfolio is diversified across multiple asset classes which should be according to the investor’s risk appetite. Looking at my long-term investment strategy, real estate fits in perfectly for Ten-thousand dollar investment. My portfolio is already jam-packed with high-risk assets and Real Estate will do a great job at hedging the risk factors without minimizing profitability in any significant way.”
Francis Obasi Cofounder and CEO of Lead Wallet.
If I have a spare $10,000 right now for investment, first, I’ll invest 55% of the funds into new crypto startups being run by professionals and backed by companies like Coinlist; LID Protocol, and Binance. Second, I’ll invest 20% of the funds into Lead Token as there is still potential for massive growth in the coming months/years. Third, looking at the situation of Nigeria, and not knowing where the current protest (uprising) on #EndSARS is headed, I’ll reserve the rest 25% in USDC/USDT to hold against a potential Naira crash. I’m confident that there is every possibility that the Dollar will become scarce again in the coming weeks/months due to the ongoing protest, thereby returning instant gains for immediate spending on basic needs.”
Dapo-Thomas Opeoluwa Global Markets analyst and an Energy Trader.
“There are so many ways to invest $10,000. The real question depends on the investor. His risk appetite, his investment horizon, when does he or she want to liquidate? The answers to these now limit the options of investments. So for safe and long-term investments, I always advise investing in index funds, Eurobonds or the Nigeria International Debt fund. This is with the caveat that says ‘low risk equals low returns’. Also, I usually would say, invest in investments that beat inflation so you won’t suffer negative real turns.”
Victoria Njimanze Investment Analyst at a Nigerian Investment Bank
Well, off my head I’ll go with Bonds, cryptocurrency, Stocks, and then alternatives. I would definitely make my findings first, but I’ll make a larger portion go into Bonds say 40%, 30% in cryptocurrency, 20% in stocks, and 10% in alternatives like commodity market so as to have a diversified portfolio.”
Akinsola Esan, a credit risk analyst at Nigeria’s Tier 1 Bank.
Basically, the goal is to earn substantial returns on investments – dividends, capital appreciation, and secondly, beat inflation in naira which is currently about 12.85%. With $10,000, I’ll spread my investments across foreign equities such as purchasing and holding stocks of companies like Apple, Facebook, Google, Fastly, Nio, Amazon, to list but a few, and also buy some top-performing dollar-denominated Mutual funds such as Vantage dollar funds and some other ones recommended by Nairametrics. Lastly, I will look in the area of cryptocurrencies by investing as much in bitcoin, Ethereum, and other recognized Cryptos. There are some dividend-paying stocks listed on the Nigerian stock exchange as well, I will consider holding a number of them.
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Due to the present fickle nature of global financial markets, most financial experts interviewed above are unsurprisingly keen on mostly U.S dollar-dominated financial assets, thus reflecting the greenback’s dominance in demand amid the COVID-19 infection exploding at an alarming rate.
How investing in US, UK stocks can be seamless – Tosin Osibodu
Tosin Osibodu discusses how investing in foreign stocks can be a more knowledgeable and transparent process.
Investing in stocks has always been touch-and-go for Nigerians, both at home and in diaspora. A typical tale of the-more-you-look, the-less-you-see, many Nigerians have experiences – both real and imagined – of how they have lost some money in the stock market.
Amidst all of these, startups offering an opportunity to invest in foreign or local stocks have the problem of trust to deal with, before they can successfully break into the market.
Co-founder and Chief Executive Officer of Chaka, Tosin Osibodu, said this was a major challenge for Chaka when it launched in 2019.
Tosin was a guest on Nairametrics’ Business Half Hour radio programme where he explained that with Chaka, investing in foreign stocks have become a more knowledgeable and transparent process that enables investors to make informed choices.
Chaka, as Tosin describes it, is a gateway that allows Nigerians to easily invest in local and foreign stocks, and also allows those in diaspora to invest in local stocks.
According to Nairametrics’ investment analyst, Olumide Adesina, Chaka “makes it easier for many Nigerians to access world brands like Coca-Cola, Pepsi, Twitter, Facebook, Amazon, General Electric, and provides top-class access to stocks listed.”
With Chaka, global stocks such as Apple, Alibaba, Google, Manchester United, the S&P 500 index and several others listed on NASDAQ, the New York Stock Exchange, and the Nigerian Stock Exchange, and top brands from over 40 countries are only a tap away for investors.
Averting the sour experiences
Sour experiences in investing are usually a result of poor knowledge of the market, and little or no access to market insights. As Tosin explained:
“The market is not bad everywhere at the same time. The secret is knowing the right market to invest at any time, and having the right information.”
Information about market fundamentals, insights and knowledge of the right portfolio at any time will guide an investor towards taking the right buy-hold-or sell decisions, and the Chaka weekly webinars offer this.
Apart from the regular insights, investors can also rest easy knowing that they have the backing of financial regulators such as SEC, NSE, CSCS in Nigeria and SEC, FINRA, SIPC, IRS in the U.S. This is no mean feat for investment start-ups and Tosin admitted that getting the approval of these regulators formed a large part of the initial challenges.
Building automated trading systems to create wealth
During the years spent schooling as a systems engineer in the US, Tosin observed the ease of investing in the stock market, a direct contrast to what was obtainable in Nigeria. Though a systems engineer by training, he was passionate about solving the problem, and reducing access barriers to local and global markets.
Back in Nigeria, he teamed up with his life-long friend and cousin, Bolanle Osibodu to set up Chaka.ng. With a core financial expert and a systems engineer, the company was all set to get rolling.
The goal was simply to reduce barriers to trading stocks across borders, and help Nigerians cash into the emerging mine that was the stock market.
With the Chaka solution, investors can register, get verified, buy and sell stocks the same day. The no-minimum investment rule also makes it open to beginner investors, allowing them to buy as much as they can afford.
For instance, even though the share unit of a company is worth $500, an investor may invest $100 and free up funds to build a well-rounded portfolio. According to Tosin, “if you are above 18 years and interested in investing, we don’t believe that you should be restricted by funds”.
It also has other unique features like the Naira or Dollar conversion on a per-asset-basis so that you can see how a Naira investment would perform in dollar assets or vice-versa. Its low transaction charges and wire transfer fees makes it even more affordable for Nigerian investors, especially since there are no hidden charges.
There are other companies who serve as digital brokers to Nigerian investors. But rather than see them as competitors, Tosin and his colleagues regard these startups as potential collaborators.
“Anyone that does what we do and shares same vision is a potential collaborator,” Tosin said.
One of the ways of collaborating is by providing execution services, white-label services and market automation technologies for corporate and institutional clients, so that these companies integrate Chaka into their operations to provide solutions for clients such as KYC verification, and user-onboarding.
Chaka partners with Citi investment capital in Nigeria and a global broker in the US, through which its offers are regulated by the relevant bodies. The aim of all collaborations is not just for profit but to improve client trust, increase foreign direct investment, and improve the investment income of Nigerians.
“Our focus is to create an amazing customer experience, because the more you can service customers in the way they want to be serviced, the better it is in the long term. This is seen in our lower commission rates, seamless onboarding process, best prices. We are focused on giving the buyer the most transparent offer,” he explained.
With a team of technologists and financial professionals working around the clock, Chaka remains on course to continually improve investment offers, and provide better decision-making tools to customers.
How to invest in small-cap stocks
Small capitalized stocks according to the NSE are listed companies with a market cap below $150m.
There are two meat-pie shops in a city. One has two locations, while the other is a mega meat pie chain with 100 locations. Assuming they both have the same profit margin say 20% on cost of sales, which meat-pie chain will make more in terms of revenues?
Simple, the 100-location chain will have a higher sales volume and revenues because that chain can sell more pies. However, in terms of which restaurant is growing faster? Well, the answer is the smaller chain. How? The smaller restaurant is able to add say two more shops and grow by 100%, the larger chain can add 20 new location and just grow by 20%. A smaller base can grow faster than a larger base; its math.
This is the same for stocks. All things being equal, a company with a lower share price is able to see an appreciation in her share price faster than another company with a higher-priced stock. Look at it this way, a share price movement from N1 to N2 represents a 100% gain in market price, but a stock priced at N200 per share will need the share price to move to N400 for a similar gain of 100%.
A small capitalized stock will have a faster growth rate than a high capitalization stock because the lower-priced share can double faster than shares of higher-priced high cap stock. This is the lure of smaller capitalized stock; they can post price increases faster than large-cap stocks.
Small capitalized stocks (small cap), according to the Nigerian Stock Exchange, are listed companies with a market cap below $150 million. Capitalization is simply the total number of shares issued by the company multiplied by the share price of the stock. As at June 2020, small capitalized stock had a cumulative market value of N971 billion ($2.51bn). Small caps as a sector also outperformed the total NSE ASI index – the small caps returned a negative -6.61% as compared with negative -18.31 returned by the broad NSE index of all listed stock.
Small caps stock is sometimes termed as growth stock because they still have tremendous opportunities for growth. In our earlier example, the meat pie company with just two outlets can grow to add hundreds of new outlets, thus boosting earning and subsequently the share price. This means when the investor is considering small-cap stock, he is looking for a high growth stock, in this case with a slightly higher P.E. ratio but trading at a price below future earnings. Small-cap investing is trading on price movement, not dividend per say, its trading not on market share but price movements, It’s a momentum play. Whilst earning is important in setting a future direction for the share process, the investors is focused on price arbitrage to take advantage of mispricing. This makes trading in small caps very risky and capital can be lost.
How does investor trade on small cap?
Since the driver is momentum trading driven by daily prices, a key metric to screen with is price movements of 15% band from 52-week price high of small caps (N60b in market caps) with an average 90-day trading volume of 2m shares with a Price Earning ration below 15 and Earning yield above 15%
From my screen, I get these candidates:
- Berger Paints
- Fidelity Bank
- Fidson Drugs
- First City
- May and baker
- United Capital
- Vita form
Again, you can construct your own screen. What is key is to seek out a stock with a market cap below N60 billion, that is constantly trading but selling today at a price below its 52-week high. This pricing can simply be the result of COVID-19 induced slow down. Then buy that stock at a price that is “cheap” hence the lower P.E. Ratio, most importantly, you want to build in some risk management by buying high historical dividend yield stock to ensure if you have to hold, you receive a divided yield higher that the risk-free rate.
Stock trading is risky and you can lose your capital, the stocks listed above are illustrative and do not constitute buy or sell advise.