Nneka : What is a stock?
Ugometrics: 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?
Ugometrics: 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 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 NSE and what companies
trade their shares on it?
Ugometrics: 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). 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 NSE?
Ugometrics: 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?
Ugometrics: 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?
Ugometrics: 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 right issues and
public offer?
Ugometrics – 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 a 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 a 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?
Ugometrics: 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 them fees.
Nneka : Fees Ke? How much are their fees?
Ugometrics: 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.
Nneka : Now, how do I start buying shares?
Ugometrics: 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?
Ugometrics: A share price is the 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?
Ugometrics: 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 is that has a 10million outstanding shares
and a 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 being that
they have 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 have nothing to do with the share price
going up or down?
Ugometrics: Not directly. Reason is that companies
that have 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 affect 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?
Ugometrics: Now that is the technical part and that
is why you have a stockbroker. Stockbrokers are
there to advice you on which stock to buy or sell or
hold
Nneka : What is buy, sell or hold biko?
Ugometrics: “Buy” is when a stockbroker advices
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 loose
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 that
do not sell if you own it 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 wan to rely on a
stockbroker for advise or more like I just want to be
able to decide on my own whether a stock is cheap
or expensive or bad?
Ugometrics: 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
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, pls what are they?
Ugometrics: 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 its 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?
Ugometrics: 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 a 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?
Ugometrics: Then you must like long term
investing. That off 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 the 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?
Ugometrics: 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 dividend yield.
Using our example above, the company decided to
pay out 20kobo out of the earnings per share of
50kobo as 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, stocks
prices do not necessarily remain the same and as
such the 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?
Ugometrics: There is also bonus issue which
companies also give to its shareholders. Bonus
issue basically is when the company agrees to give
out additional shares to it 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?
Ugometrics: 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 are 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?
Ugometrics: 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
Ugometrics: Yes you can. It was a pleasure
explaining this to you.
Source: web.ugometrics.com/how-to-invest-in-nigerian-stock-exchange/
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