Guide to Investing in stocks

The Beginner’s Guide to Investing in the Nigerian Stock Market www.stockmarketnigeria.com

© Stockmarketnigeria.com www.stockmarketnigeria.com

Got investment advice, questions or comments? Express yourself! Join the online community at www.stockmarketnigeria.com/forums

2

The Beginner’s Guide to Investing in the Nigerian Stock Market

by Ikenna C. Nwaiwu

Copyright © 2004 by Stockmarketnigeria.com™

Published by Stockmarketnigeria.com™

You have permission to post, email, print, distribute for free,

or bind and resell this book, as long as you make no changes

or edits to its contents or digital format. In fact, we would love it if

you made lots and lots of copies.

All other rights are strictly reserved.

For further enquiries please contact

[email protected]

This book is dedicated to

Mr. & Mrs. C. O. Nwaiwu

Chidinma, Kelechi and Nnamdi Nwaiwu

Uncle Toyin Ojitiku-Emmanuel.

Kelechi Ezeribe Ugochi Akwiwu Emeka Edeh Nkiru Ohale

Chukwudi Agagwu Azuka Okafor




3

Contents

1. Why you should invest in the Stock Market 4

2. What are Shares, Bonds and Treasury bills? 8

3. What is a Stock Market? 12

4. What is a Unit Trust (Mutual Fund)? 21

5. Companies and their Accounts 27

6. Launches, Rights Issues,

Share Buybacks, And Takeovers 34

7. Investment Strategies for Active Investors 39

Recommended Reading 48




4

1. WHY YOU SHOULD INVEST IN

THE STOCK MARKET “Let honesty and industry be thy constant companions, and spend one penny less than thy clear gains; then shall thy pocket begin to thrive; creditors will not insult, nor want oppress, nor hungerness bite,

nor nakedness freeze thee.” – Benjamin Franklin

e all invest for various reasons. Perhaps you want an alternative source of

income to supplement what your salary. Perhaps you wish to invest for your

children and send them to school in Universities abroad. Perhaps you wish to invest

for your parents and provide for them a regular source of income apart from their

pension. Perhaps you wish to start investing for your retirement now so you would

not have to be dependent on anyone when you are old, or have to rely on a meagre

pension. The fact is, the earlier you start investing, the more money you will make. In

the stock market, time is money.

"The most powerful invention of man is compound interest." – Albert Einstein

Here is an example: let’s suppose that an 18 year old today invests N100,000 in the

stock market towards his retirement, and his investment grows at just 20% annually.

If he does not touch that investment until he is 60 years old, do you know how much

that would be? N211.6 million (Fig 1). A young woman invests N200,000.00 towards

her child’s university education the year her child was born. At 20% interest, by the

time the child is 21 years old, the investment would be worth N9.2 Million - enough

to send the child to school abroad for a Masters Degree.

W




5

Fig 1: N100,000 invested by an 18 year old for his

retirement in the stockmarket at an average of 20%

returns.

0

50

100

150

200

250

300

18 22 26 30 34 38 42 46 50 54 58

Mill

ions

Years

Am

ount

In N

aira

The stock market is a powerful investment vehicle we can use to meet our financial

goals. The stock market makes the power of compound interest work for you.

Compound interest simply means that the money you invest earns interest, and that

that interest earns interest, and so on. Money that's compounding never sleeps.

Every second of every day, 24 hours a day, 365 days a year it is multiplying. Instead of

you working for the money, the money is working for you.

Here are more reasons to invest in the stock market

1. The stock market gives your higher returns than investing in bonds, treasury

bills, certificates of deposit (CD’s) or putting your money in a savings

account.

2. Investing in the stock market helps you stay above the inflation rate.

Between 1999 and 2001, the Nigerian stock market grew by an average of

33% while the inflation rate was at an average of 12% within the same

period.




6

3. You can invest in the stock market with very little money. Many

stockbrokers will open a stock broking account for N3, 000 or less. You can

buy into a high quality mutual fund for as low as N10, 000.

4. When you own actively traded shares, you can easily sell them and get your

money back in a short time.

5. When you buy shares in the stock market, you get to become a shareholder

or part owner of a public company with all the privileges entitled to

shareholders.

6. You do not need to be an expert in shares or even bother yourself about

which shares to buy. Investment bodies called unit-trusts or mutual funds

can manage your investment for you for a small commission. We will talk

more on this in chapter 4.

7. Investing in the stock market is fun. If you choose to manage your stock

portfolio yourself (i.e. you decide which shares to buy and hold and which to

sell) you will realize that you can make money from the stock market and

have fun doing it. Active stock picking is exciting and (of course) financially

rewarding.

Well we have talked about all the advantages of investing in the stock market.

However note that it is possible to lose money in the stock market if an investor does

not go about investing the right way. The stock market is not a get-rich-quick scheme.

When you invest in the stock market you should be thinking long term. It rewards the

patient, intelligent investor. People who panic are not handsomely rewarded by the

market. Making money in the stock market requires knowledge, patience and self-

control. That is why you are reading this book – to build up your knowledge and

courage so that you can make good profits from the stock market. Do not be afraid

of investing in the market. If you follow the simple rules in this book and are

courageous, you will make it. The principles you have to follow to make money in the

market will be outlined in this book. Someone who is not knowledgeable, has a low




7

risk tolerance, or is not interested in buying individual shares, is safer buying into a

mutual fund (unit-trust).




8

2. WHAT ARE SHARES, BONDS AND TREASURY BILLS?

“The educated differ from the uneducated as much

as the living from the dead.” – Aristotle.

“Money is an idea” – R. Kiyosaki

hares (stocks) represent ownership in a company. When you buy shares you

become a part owner (shareholder) of a company. Public companies have

hundreds or thousands of owners. Each owner contributes a little towards the capital

of the company. This contribution is represented by shares. As the owners of a

company, the shareholders are entitled to dividends, and are also entitled to vote at

the Annual General Meeting (AGM) of the company.

There are two main kinds of shares: ordinary shares (common stock), and preferential

shares. Preferential shares are usually owned by the founders of the company. We are

mainly interested in ordinary shares as this is the kind traded on the stock exchange.

Ordinary shareholders are the risk-takers of the business. They share in the profits

and losses of the business. If a company fails and goes bankrupt (folds up), its assets

are sold (i.e. the company is liquidated) and the proceeds are used to pay its creditors

and suppliers. The money is also used to pay its bondholders. If any money is left, the

shareholders are paid last –the preferential shareholders, before the ordinary

shareholders. If nothing is left, the shareholders go empty handed. Thus they bear the

risk of the business.

Ordinary shares usually have a par value and a market price. You might come across

the phrase “A 50k share sells for N3.00”. That means the share actually sells in the

S




9

stock market for N3.00 – the market price. The 50k figure is the share’s par value,

which means that the company’s shares are in units of 50k. This figure is of no

practical relevance to us. It is used by accountants to balance the company’s books.

Common stocks in American companies have no par value.

There are three ways investors make money in shares – dividends, capital

appreciation and bonus shares.

1. Dividends are paid in proportion to the number of shares a shareholder owns in

a company i.e. the more shares you own the more you will receive. For example

when a company declares a dividend of 35k, it means that a shareholder who

owns 10,000 shares in the company will get N3,500 as dividend payment. Most

companies pay a final dividend at the end of their financial year. In addition to

this, some companies also pay an interim divided around the middle of their

financial year. It is not compulsory for a company to pay its shareholders a

dividend. If the company made a loss for that year, it may decide to forgo paying

its shareholders any dividend.

2. Capital appreciation refers to the rise in the price of a share. If you buy a share at

N3 and it rises to N 6, your investment has doubled in value.

3. When a company makes profit, it does not pay it all out as dividend. It may

reinvest part of the profit. This increases the value of the company. After some

years, to reward shareholders, the company can create new shares to represent

this added value, and give these shares as a bonus or scrip issue to the

shareholders. Shareholders can retain these new shares or sell them, converting

them to cash. For example, a company can give its shareholders ‘One new share

for every Two held’ on a certain date. That means that the total number of shares

the shareholder owns in the company on the specified date will be increased by

50%.




10

Shares are securities. A security is a legal document that shows you own a particular

investment. Securities can be traded in the financial markets. Other common types of

securities are bonds, Certificates of Deposit (CD), Treasury Bills etc

Bonds A bond is a legal document that shows someone owes you money with interest. It is

an IOU note. When you buy a bond you are loaning the seller money at a specified

interest rate. (Interest is the cost of borrowing money). The interest or coupon will

be paid you yearly (or as stated) and finally the amount loaned, the principal or face

value, will be repaid you (redeemed) at a specified date – the maturity date.

Governments, companies and public institutions can sell bonds. Generally bonds are

less risky than shares, but they give lower rates of return. There are different types of

bonds – debentures, convertible bonds, floating rate, zero-coupon etc. The most

secure bonds are the Federal Government Bonds. They are termed gilts. Your

stockbroker can help you buy bonds when they are on offer.

Certificate of Deposit A Certificate of Deposit (CD) is a document that shows you have deposited money in

the bank for a period of time at a specified interest rate. CD’s are sold by banks, and

attract a high interest rate. These rates range between 13-17%.CD’s are low risk

investments and are thus very secure, but their rates of return are lower than that of

the stock market. They are issued (sold) by banks. If you own a CD and wish to get

your money back before the maturity date, you can sell it at a discount. It is a liquid

investment (easily convertible to cash).

Treasury Bills Treasury bills are securities sold by the government. Treasury bills are sold at a

discount, and have their full value paid at maturity. For example, a N10,000 treasury

bill can be bought at N9,300 and redeemed for its full value after a specified time,

usually 90 days. Treasury bills are auctioned by the Central Bank. You can buy




11

treasury bills from your local bank. Treasury bills are one of the most secure

investments. Treasury bills and CD’s are called money market instruments.




12

3. WHAT IS A STOCK MARKET?

“I want to be so rich, that when I write a cheque, the bank will bounce”

– Robert Allen in “ Multiple Streams of Income”

stock market (or capital market) is a place where stocks, bonds, and other

securities are traded. A stock exchange is the body that runs a stock market.

Some stock markets are not run by any major body, but are coordinated by their

dealers. These are termed over the counter (OTC) e.g. the NASDAQ in America. The

stock market in Nigeria is run by the Nigerian Stock Exchange (NSE).

Functions of the stock exchange The stock exchange helps companies generate capital. As a primary market, it

provides an avenue for them to sell new shares and bonds to investors. The

companies can then use the proceeds from these sales to expand their businesses,

develop new products, buy new equipment etc.

The stock market also provides a means for investors to trade in the shares of

companies they own among themselves. In other words, it serves as a secondary

market. For example, one who bought the shares of a company at a particular price

may sell it to another investor. The investors are the ones who profit from this type

of trade – companies do not.

The stock exchange also has the function of upholding rules and regulations so that

shady people do not cheat investors of their hard earned money. It gives investors

security.

A




13

The Nigerian Stock Exchange The Nigerian Stock Exchange (NSE) was started in 1961 and was formerly called the

Lagos Stock Exchange. As at March 2003, over 200 securities could be traded on the

Nigerian Stock Exchange. The NSE has its head office in Lagos, with branches in

Port Harcourt, Kaduna, Onitsha and Ibadan, Kano, and Abuja. Shares are traded

from 11:00AM to 1:00PM on the NSE from Monday to Friday with the exception of

public holidays. A computer system is used by dealers (stockbrokers) to buy and sell

shares. This computerized system known as the ATS (Automatic Trading System)

allows dealers to enter buy and sell orders for shares into a computer which matches

the buying and selling orders at the matching prices.

The Securities and Exchange Commission The SEC is the government agency that regulates the stock market. Its function is to

protect the investor and to build a strong stock market. The SEC passes and enforces

regulations to which quoted companies must abide.

Stockbrokers As a private investor you cannot buy shares from the stock market yourself, you have

to go through a stockbroker. A stockbroker is licensed to trade shares on the floor of

the stock exchange. Stockbrokers charge a commission termed brokerage for this.

The brokerage fees charged by stockbrokers are regulated by the Securities and

Exchange Commission (SEC). For example, if you buy shares worth N10,000.00

you pay* - Brokerage commission = 2.75% of 10000.00 = 275.00 Sec Levy = 1.00% of 10000.00 = 100.00 Contract stamp = 0.075% of 10000.00= 7.5 VAT =5.00% of 275 = 13.75 Total = N396.25

And if you sold shares worth N10,000.00 you pay a total of




14

Brokerage commission = 2.75% of 10000.00 = 275.00 NSE levy = 0.25% of 10000.00 = 25.00 CSCS = 0.25% of 10000.00 = 25.00 Contract stamp = 0.075% of 10000.00= 7.50 VAT = 5.00% of 275 = 13.75 Total = N 346.25

*These rates may change over time.

Stockbrokers also provide you with investment advice. They may offer to manage

your investments for you. Stockbrokers also assist companies which want to float

(launch) new shares and bonds on the stock market.

To buy shares you need to open an account with a stock broking firm. Just like banks,

stock broking firms require you to have a minimum amount before you can open an

account with them. Some of the big firms will need you to have at least N100,000.00

while some smaller firms can open an account for you with just N2,000.00. The

money you use to open the account with the stockbroker is your money and is used

to buy shares for you. You are not paying it to the stockbrokers. The stock broking

firm profits by taking a commission from every trade they carry out for you.

Choosing a stockbroker A list of stock broking firms is given in the Appendix. To avoid fraud, always deal

with reputable stockbrokers. Stock brokers should be registered with the Nigeria

Stock Exchange. Visit the stockbroker’s office and deal directly with its staff. Do not

depend on people who front for stockbrokers. Also be wary of stockbrokers who do

not carry out your orders.

Some Stock Market Terms

The All-Share Index A stock market index measures the general performance of stocks on the market.

Share prices rise and fall regularly. The index, a kind of statistical average, gives

investors an idea of the general trend of prices. In other words, if the index rises, it




15

means the prices of most shares are rising. An index is calculated based on the prices

of selected securities in the market. Nigeria’s stock market index is called the All-

Share Index (ASI), and was started in 1984.

A listed company When a company is listed or quoted on the stock exchange, it means that its stocks

can now be traded on the exchange. The stock exchange publishes the share prices of

listed companies. For a company to be listed, it has to apply to the NSE and the SEC

for approval first.

Market Capitalization Market Capitalization (cap) is of two types - the market cap of a company and the

market cap of the entire market. The market cap of a company refers to the monetary

value of all its shares. It gives you an idea of the size of the company. Similarly, the

market cap of the market gives you an idea of the size of the market. i.e. the total

value of all the billions of shares registered the stock exchange. Till date, Nigeria’s

most capitalised company is Nigeria Breweries Plc. Nigeria’s Stock Market

capitalization hit 1 trillion Naira in September 2003.

Bulls and Bears In investment jargon, the stock market is described as a bearish when prices are

falling and expected to fall further in the short to medium term. It is said to be bullish

when prices are generally on an upward trend.

A Stock market Crash A huge and sudden slump in stock prices and trading volumes (number of shares

traded) is called a stock market crash. A stock market crash usually occurs after a long

bullish market when shares are overvalued (cost a lot more than they are worth).

Investors and speculators may suddenly start selling in a panic and share prices

tumble to very low levels as there are a lot more people selling than buying. The most




16

famous stock market crash occurred in the U.S. in 1929, and led to the Great

Depression.

A rally A stock market rally means that after a long drop in prices of shares, they are

beginning to rise again.

Share Categories Blue Chip shares These are shares of large companies which have long stable histories and are of

enduring interest to investors. They are companies which are quite mature and

regarded as safe investments. Examples of some blue chip shares are First Bank PLC,

Lever Brothers PLC, and Nigerian Breweries PLC

Cyclical share A cyclical share is one whose fortune is directly tied to the state of the overall national

economy. When the economy is booming, the companies ( and their shares) do well.

During a recession they do poorly. Examples of these are the construction companies

and those in the building materials sector.

Defensive shares A defensive share is largely immune to changes in the macro-economy. Regardless of

whether the overall market is bullish or bearish, companies whose shares are classed

as defensive continue to sell their products. These include food industries,

supermarket chains etc

Growth Shares Growth shares are those of companies that reinvest most of their earnings rather than

paying them out as dividends. Growth stocks are expected to show above-average

capital appreciation in the future.




17

The share categories are not strictly defined nor are they exclusive. A growth share

can also be a blue chip.

Central Securities Clearing System (CSCS) When shares are bought or sold on the stock exchange, the transaction needs to be

documented and confirmed in a central registry, the change of ownership recorded,

money transferred, etc. This process of clearing and settlement used to involve a

lot of paper work and took quite some time. However, a part of the Nigerian Stock

Exchange called the Central Securities Clearing System (CSCS) Limited now carries

out this function using computers. The CSCS acts as a sort of electronic share

registry. A CSCS report is sent to investors who buy shares on the stock exchange

indicating that the transaction has been officially registered. It shows how many

shares an investor owns on the stock exchange. A CSCS should be ready four

working days after the transaction, though it may take a little more time before you

get it from your broker. The CSCS is a very important document. It can be used as

collateral if you wish to borrow a loan. The CSCS is issued quarterly. One benefit it

provides is that it eliminates the risk of lost certificate.

The Daily Official List

The stock exchange publishes a daily official list of the prices of all shares traded on

the stock exchange. The list is divided into categories or sectors depending on the

type of company. You can see an abridged version of this list in the business section

of most dailies, but a more comprehensive listing is available in financial Newspapers

like Business Times, Business Day and Financial Standard. Alternatively, you can check the

stock prices of companies online on some websites. (See Appendix - Internet

Resources)

The stock exchange list is divided into the First Tier and the Second Tier Securities

markets. The First Tier section comprises the big companies which large market

capitalization i.e. the total value of all their shares is very large. The second-tier




18

securities (emerging) markets section lists the shares of smaller companies which are

not big enough to make it to the first tier securities market. The memorandum

quotations section lists some authorised unit trusts. The prices of these unit trusts

are quoted by the exchange and so can be followed by investors.

How to Read a Share – Price Column We will now look at how to interpret a share price column. Take a look at Fig 3.1 It is

a reprint of part of the Banking sector section of the daily official list, as you would

find it in the Financial Standard or Business Times. Go down to the entry First Bank.

The first column you will find against that is the public quotation price.

Dividends

Ordinary Share

Public Quotation Price (N)

Current Market Price (N)

Ex Div

Ex Sc Date Pd Inter Final EPS

PE Ratio

EIB INTERNATIONAL BANK PLC 0.50 2.39 + x x 7/2/2004 0.12 0.32 7.47

FIRST ATLANTIC BANK PLC 0.50 1.67 + x 12/2/2004 0.07 0.14 11.9

FIRST BANK OF NIG. PLC 0.50 28.75 + 4/8/2003 1.5 1.19 24.2

Business Done This Years

Price (N) Date Quantity High Low

Last Ex-Div Date

Last Ex-Sc Date

2.28 18/08/04 69,301 3.07 2.09 19/01/04 19/01/04

1.75 18/03/04 1,158,341 2.23 0.95 20/01/04

29.39 18/03/04 5,763,363 31.00 20.00 18/07/03 18/07/03

Fig3.1 The share price column




19

Against First Bank is written 50k, which is the par value of the share. Next you see the

current market price of N28.75. We have explained both this terms in chapter 2. After

that, you see a + against the share. A + indicates, that there were more buyers than

sellers of that particular share in the stock market, thus the share is likely to rise in the

near future. Conversely, a – indicates that there were more sellers than buyers. Next

you will find no cross in the ex - dividend and ex - scrip column. A cross in the ex-

div column means that if you buy shares in First Bank you will not be entitled to the

recently declared dividend. Likewise a cross in the ex-scrip column means you will not

receive the recently declared scrip issue.

Next you see the business done column. This gives you the details of the last

transaction carried out on that particular share - the price at which the share was

traded; the date and the quantity of the transaction are listed. We see that 5,763,363

First Bank shares were traded at a price of N29.39 on 18/03/04. This column helps

us know whether a share is being actively traded or not. A share which has a very old

business done date means that nobody wants to buy it. These shares, which are

difficult to sell, are almost ‘dead’.

The next column shows ‘This year’s high, low’. This shows the highest and lowest

prices of the share in the last 52 weeks. We can see that in the 1 year period, the share

price of First Bank reached a max of N31 and a low of N20. Some make a decent

profit by buying at the low price and selling at the high price in a one year cycle.

The last ex-div date shows the date after which any shares you buy will not take part

of the recently declared dividend. The last ex-scrip date shows the date after which

any shares you buy will not take part of the recently declared scrip issues. i.e. the scrip

issue belongs to the seller after that date.

In the dividends column, we see the dividends date paid. The dividends date paid is

the date when you will actually be sent dividends. First banks last dividend was paid




20

on 18th July 2003. Watch out and beware of companies that have not paid dividends

in a long time.

The next two columns show the interim and final dividend payments. We see that

no interim dividend was paid by First Bank but a final dividend of N1.50 per share

was paid by the company.

Next is the EPS or earnings per share which is a very important figure. It tells us that

a share selling at N20 earns N1.19 for you, the investor every year. At this rate, it will

take an investor about 24.2 years to recoup his investment. This 24.2 is the price-

earnings (PE) ratio. It compares the price of the share to how much it can earn for

you.




21

4. WHAT IS A UNIT TRUST

(MUTUAL FUND)?

“If you have the stomach for stocks, but neither the time nor the inclination to do the homework,

invest in equity mutual funds.” – Peter Lynch, one of Americas most famous fund managers.

here are two methods of investing in shares. You can invest directly (actively)

or indirectly (passively). An active investor manages his investment decides

which shares to buy and sell. A passive investor buys into a unit trust and allows a

professional do it for him.

A unit trust (or mutual fund) is a kind of collective or pooled investment scheme. The

manager of a unit trust combines the money of several investors and invests it in

stocks, bonds, real estate, and money market instruments. Unit trusts provide you

with professional management of your capital and help you diversify your investment

among leading securities. (The terms unit-trust and mutual fund will be used

interchangeably in this text).

To illustrate, let’s imagine you want to invest N1000.00 in a unit trust that sells for

N100 a unit. Your money, which will buy you 10 units in the trust, is pooled with that

of many other investors in the trust and invested by a professional manager. Suppose

after a year, the value of the trust’s investments increase by 30%. That means the

value of each unit you own has increased from N100 to N130. This is a simplified

example of how a trust works.

T




22

You can always sell your investments in an open-ended unit trust and get your

money back anytime you want. At your request, the managers of the unit trust will

buy back your shares from you. But with a closed-ended fund, you can only sell your

units if another investor is willing to buy. If there is no one willing to buy, you can’t

sell.

Bid and Offer prices When a unit trust is first launched, its units sell at a fixed price for a set period of

time. After this time, each unit now has two prices – the higher ‘offer price’ and lower

‘bid price’. An investor buys units at the ‘offer’ price and sells them at the ‘bid’ price.

Again, let’s illustrate with an example. Suppose the price of a unit in XYZ unit trust

varies as follows in the first and second year

Year offer Bid

1 N50 N45

2 N70 N65

An investor may buy a unit at N50 (offer) the first year and sell at N65 (bid), making a

profit of N14 or 28% (not N20). The reason for the spread in price is due to the

commissions and dealing expenses of the trust. Also, a unit trust charges you for the

service of managing your money for you. This may be a commission of 5 % of the

value of your initial investment, and there can be an annual charge of around 1%, but

these figures vary.

Advantages of a unit trust 1. Unit trusts provide professional fund management for you. There are many

trusts available to meet your investment goals. They are a good alternative for

those who don’t have a good knowledge of the stock market, or the time to

study it.

2. Unit trusts help make your investments safer, especially if the amount you have

to invest is small, and you don’t want to risk it all in one company ( i.e. putting all

your eggs in one basket. Investing in only one share exposes you to the risk of




23

loosing it all if the company fails). The manager of the trust diversifies your

investment, thus guaranteeing its safety.

3. Unit trusts usually pay out the income (dividend) they receive on their

investments to their unit holders. Sometimes the investor can decide to receive

the income or decide to have the trust reinvest it on his behalf.

Disadvantages of unit trusts 1. Some unit trusts do not perform very well and may not meet up to the

performance of the All-Share Index.

2. A fund manager is forced to abide by strict rules of diversification. Because of

this a fund manager can only invest, say a max of 5% of the funds total money,

in any particular share even if he is 100% sure that share will double or quadruple

in value. The individual investor has no such restraint – he can invest as much of

his holding as he likes in a single well performing share if he likes. Thus the

active stock picker has the advantage of concentrating his investment on a few

good stocks and making excellent returns.

Quoted unit trusts The unit trusts quoted on the Nigerian Stock Exchange are found on the

Memorandum quotations section of the NSE’s daily official list. Some unit trusts are

not officially quoted on the stock exchange and are run privately by stockbrokers for

their clients. Your stockbroker may have a number of these, so ask.

MEMORANDUM QUOTATIONS

Name Offer Price Bid Price ICON UNIT TRUST 3.06 2.01 CENTER POINT UNIT TRUST 1.54 1.48 CONTINENTAL UNIT TRUST 1.25 1.19 FIRST INTERSTATE UNIT FUND 1.48 1.45 THE IBTC NIGEIRAN EQUITY FUND 3,411.26 3,296.58 THE DISCOVERY FUND 124.17 120.53 FIDELITY NIGFUND 1.36 1.30

Fig 4.1 The Memorandum Quotations section of the NSE’s Daily Official List, 24/10/03.




24

Types of unit trusts Based on their investment objectives, most unit trusts (mutual funds) can be classed

into three main groups (though some trusts are combinations of these): those that

seek growth of capital, those that seek current income, and those that seek stability

and safety of capital. In these groups, you will find trusts that invest according to

particular philosophies or in certain areas of the economy. Some examples of these

include:

General funds: These invest in different securities, money market instruments and

real estate. They are not restricted to any particular area. E.g. The Discovery Fund

managed by Asset and Resource Management Company Limited (ARM)

Value funds: These invest in companies with large assets, especially blue chip shares.

Equity funds: These invest only in shares and seek capital appreciation. The fund

manager has the choice to invest in any company and is not bound by any particular

philosophy.

Sector funds: Invest in particular sectors of the economy. For example, Banking or

Oil companies.

Growth funds: These invest in companies with steadily increasing earnings, which

are growing at a steady rate. These are usually medium to large companies.

Tracker or index funds: These seek to mirror the performance of the stock market

index.

Country funds: These invest in the economies of foreign countries e.g. the USA or

European nations. Usually, such funds may require you to invest large amounts of

capital, as the investments are in foreign currencies.

Which unit trust should you invest in? There are many unit trusts and mutual funds available that it is sometimes confusing

deciding which to invest in. Look at the past history of the trust to know its

performance in the last three to five years. Over the long term, a good mutual fund

should beat, or at least keep up with the All-Share index. You may also wish to split




25

your investment across three or four well performing unit trusts. Some good unit

trusts to consider are -

The Discovery Fund – Managed by Asset Resource Management Company (a

subsidiary of Guaranty Trust Bank Plc), the Discovery Fund invests shareholders’

money in stocks, money market instruments, bonds and real estate. The objective of

the fund is to achieve capital growth over a long period of time. If you started

investing N10,000 in the Discovery Fund every month from January 1995, by

December 2002, it would be worth N2.6 million. You can start a Discovery Account

with just N10,000 and after that , make contributions in multiples of N5,000 as often

as you wish. To start an account, ask for a Discovery Account Opening Form at any

of the Guaranty Trust Bank branches, or call 01-2695511, 01-4718282, 09-5240850.

The IBTC Nigerian Equity Fund: The Investment Banking and Trust Company

(IBTC) fund has consistently outperformed the NSE All Share Index (ASI) for long

periods. Between February 1997 and December 2003, it posted a 315.35% return

compared with 161.44% of the ASI. Adjusted for dividends, the funds performance

translates to an annual return of 46.16% over that 7 year period. The IBTC Fund has

a minimum target allocation of 75% in quoted stocks and a maximum of 25% in

money market securities. To invest directly in the fund, obtain a form from any

branch of (IBTC). Abuja office: Opposite NNPC towers, Garki, Abuja. Port

Harcourt office: Opposite Lansar House, Artillery, Aba Road, Port Harcourt

The Nigeria International Growth Fund (Nigfund) - Managed by Fidelity Bank

Plc, the fund started operations in 2002. In its first year of operation it posted a

return of 28%. To invest in the fund, contact any branch of Fidelity Bank plc.

Cost Averaging Naira Cost averaging is a good technique to adopt when buying into a mutual fund.

It means investing the same amount of money on a regular basis, say, monthly, into

the same mutual fund regardless of the current market conditions. Using this

technique, you end up buying into the fund at the average price over the period.

Remember that mutual funds, (especially equity mutual funds) fluctuate as share




26

prices fluctuate, and buying them at the lowest prices helps you make more money.

However it is difficult to guess the funds lowest prices. Cost averaging helps you buy

it, not at the lowest, but at the average price. You can arrange for your bank to pay

money from your account into your mutual fund automatically every month.




27

5. COMPANIES AND THEIR ACCOUNTS

“To get profit without risk, experience without danger, and reward without work, is as impossible as

it is to live without being born” – A. P. Gouthev

company is owned by its shareholders, and unlike a partnership or sole

proprietorship, the owners have limited liability. In other words, they can only loose

as much capital as they have invested in the business and nothing more. One type of

corporation is the Public Limited Company (PLC). The shares of a Plc may be held

by the investing public and traded on the market.

Voting and Control Every Plc has a board of directors headed by a chairman. The Managing Director

(Chief Executive Officer or CEO) is a member of the board, and takes the

responsibility of the day-to-day running of the company. The Chairman of the

company presides over the board meetings. Other directors may be executive or non-

executive, meaning they may or may not be taking part in the daily running of the

company. In some companies, the managing director also doubles as the Chairman of

the board, though this is currently being discouraged by the SEC.

The directors and managers run the company. However the shareholders take

important policy decisions regarding the company. They have the power to control

the company if they act together. Each ordinary share in a company carries one vote

during the AGM (Preferential shares may be non-voting). Thus the more shares you

have the more influence you have. Owners of more than 50% of the votes thus

control the company. Shareholders can influence the way a company is run by voting

on the appointment or dismissal of directors and on certain other major policy

A




28

matters that have to be presented to the shareholders at a formal meeting of the

company.

A shareholder can appoint a proxy (someone to vote on his behalf) at the annual

general meeting of a company. To appoint a proxy, the shareholder has to sign and

fill a proxy card before the meeting nominating his proxy and indicating which way he

wants his votes cast on the different resolutions. In the absence of a shareholder and

his/her proxy, the directors of the company will act as proxies.

Contents of the Accounts Companies are required to produce a set of accounts each year. The stock exchange

requires listed companies to publish both their full-year and half-year results. A

company’s account gives you an idea of what is happening in the company. In a

company’s annual report, these accounting statements are published, as well as the

managing directors report, auditors report, list of directors, major shareholders and

other important information. The annual report shows you the health of the

company. Note that a company’s financial year does not necessarily have to start from

January. It can be from April 1st to March 31st .

Where the money comes from There are three sources of money the company uses in its operations. They are equity,

debt and reserves. Money put up as permanent capital by the shareholders of the

business is known as equity. This they do by buying shares. Debt refers to the

money the company borrows for its operations. The part of profit it earns and

ploughs back into the business is called the reserves. It is also part of the equity of

the company as it belongs to the shareholders.

Getting important information from company results




29

If you want to be a high performing active stockpicker, you just have to spend a few

hours each month studying company reports and reading the financial pages of the

newspapers. Every active stock picker must also learn to read accounting statements.

A company’s results contain among other things the following accounting statements:

1. The company’s balance sheet

2. The profit and loss statement (P&L)

3. The cash flow statement

4. The five year financial summary

These documents contain valuable information for the active stock picker. The

balance sheet tells you the size of the company, its debts (what it owes), its assets

(what it owns) and how much money it has in cash. It gives you a snapshot of the

company at a particular day (usually the last day of a company’s financial year). The

profit and loss statement tells you whether the company is making a profit or a loss.

The cash flow statement gives you the balance of cash coming into and out of the

company. The five year financial summary, tells you how well the company has

been doing in the last five years. This enables you judge the performance of the

company – is it growing or falling.

Active stock pickers (who personally manage their investments) must learn to read

and understand these financial statements. A good accounting textbook will give you

the basics on how to understand and analyze a balance sheet, P&L and cash flow

statement. We will not go into how to analyse financial statements in this book.

Some important investment ratios An investment ratio measures the performance of a company. The investment ratios

do not mean much when taking in isolation. They only make sense when you

compare them to those of other companies (especially those in the same sector), or to

the same company over a period of time. They are best used comparatively. Here are

some of them -




30

Profit margin This is the profit as a percentage of the company’s turnover. The turnover is the total

sales of the company in the period. The pre-tax profit margin is given by

Profit margin = profit/turnover x 100%

The Earnings per Share (EPS) This is calculated by dividing a company's earnings or profit after tax by the total

number of ordinary shares. It shows you how much each share in the company is

actually earning. The EPS is one of the most important figures to consider in stock

picking.

Price Earnings (PE) Ratio The PE ratio is a very important ratio. The PE ratio of a company compares its price

to its earnings. If a share with a market price of N20 has a PE ratio of 5.5, it means

that the share price is 5.5 times the amount of money the share is actually earning. Put

another way, if the current earning rate continues, it will take around 5.5 years to

recoup the investment in the share. The PE ratio is the figure that tells us whether a

share is expensive of cheap. A high PE ratio means that when compared to the

earnings of the company, you are buying the share at a high price. The PE is given by

PE = current market price/ earnings per share

1. If investors think the fortunes of a company are going to get better and that the

future earnings of the company may rise dramatically, they would buy shares in it

even if its PE is high.

2. A very high PE ratio could also mean that a share is over valued i.e. it costs far

too much for what it is worth. It would take you a longer time to recoup your

investment, or you could loose money if there is a price correction (the price is

devalued) after you buy.

3. A low PE ratio could mean that the share is undervalued. It could be a

fantastically good bargain for you – buying a company whose earnings are high




31

but share price is cheap (like buying a Mercedes Benz S-class for the price of a

Volkswagen beetle). These undervalued situations are the stock pickers dream.

4. A low PE ratio could mean that the earnings are quite static and just coasting

around. Also, if a company is unhealthy or its earnings will fall significantly in

future. It is not a good bargain, no matter how low its PE is.

Do not buy a company just because of its PE. When buying shares you have to put a

lot of factors into consideration before you buy. See chapter 7 – Investment

Strategies.

Yield The yield gives an investor an idea of how much income return (dividends) he can

expect on his shares. An investor interested mainly with income will invest in high-

yielding shares. Dividend yield is given by

Yield = Dividend per share / Share price x 100%

A low yield shares usually suggests a fast-growing company (it ploughs back most of

its profits for growth and expansion). A high yield indicates 1. A more mature

company – one that is not growing very fast 2. Sometimes, a more risky company.

Gearing Companies with a high proportion of their capital as borrowed money are said to be

highly geared. Companies with a small proportion of their capital in debt form are

said to be low geared. Thus gearing refers to the relationship between a company’s

debt and its equity. Gearing = Debt capital/long term capital X 100%

A highly geared company has the chance to make a huge pre-tax profit if business

booms. However the company may also risk making huge losses if business doesn’t

go well, because they need to first make interest payments on the borrowed money

before they get anything.




32

Interest Cover The interest cover is earnings as a percentage of interest expenses. This figure shows

how comfortably a company can pay its interest expenses. It is given by Interest cover = Earnings/interest charges

A company with an interest cover of 5 means that the company can pay its interest

bill 5 times from its profits. Companies run into trouble when they borrow money

and the interest charges become too high for them to pay.

Dividend cover This is the proportion of the profit paid out as dividend. It is given by

Dividend cover = Dividend/Net Profit

The dividend cover tells you whether the company can sustain paying dividends in

future even if times get rough. The higher the dividend cover the less chance the

company will have reduce or not pay its dividend if its profits fall. A dividend cover

of 4 means that company can pay its dividend 4 times from the profits it made that

year.

Some other important accounting terms Goodwill When company A buys up company B, it usually pays some amount of money called

Goodwill, over and above what the company B is worth. Goodwill is a sum used to

represent a company’s intangible assets– things like a company’s reputation, trading

connections, profit-earning capability, customer loyalty etc.

Authorized and Issued Capital The authorized capital of a company is the maximum amount of shares that the

company has authorization from its shareholders to issue. Issued capital refers to the

actual value of the number of shares issued to shareholders. A company can have

authorized but un-issued shares. In this situation, the company can issue these shares

to raise money without needing further permission from the shareholders.




33

The Auditors Report Auditors are independent accounting firms whose job is to certify that the accounts

prepared and signed by the directors of the company present a true and fair view of

the company’s profits and financial position. An investor takes it as a strong warning

that something is wrong, when an auditors report says that the accounts do not give a

‘true and fair view’ of the company, or that they do so with important

qualifications. Examples of auditing firms: KPMG, Anderson Consulting.




34

6. LAUNCHES, RIGHTS ISSUES, SHARE BUYBACKS, AND

TAKEOVERS

"Lo, money is plentiful for those who understand the simple rules of its acquisition."

- George S. Clason in “The Richest Man in Babylon”.

What is a stock market Launch? he issue of shares in a company to the public for the first time on a stock market

is called a floatation or stock market launch. In America, it is termed an initial

public offer (IPO). After a floatation, their shares can be traded on the stock

exchange. Companies make money from a floatation when their new shares are sold.

Different ways of launching shares to the market There are four ways a company floats or launches its shares on the stock exchange.

1. In an offer for sale: Shares are offered for sale directly to the public. The

company publishes information about its activities, financial position, directors,

trading records and an application form for its shares in a book called a

prospectus. This prospectus is made available for free through stockbrokers and

some banks. An offer for sales is usually well publicised on the newspapers and

radio. The offer for sale is the most common type of stock market launch.

2. When shares are launched by placing: the company through its stockbrokers

arranges to sell its shares privately to a select group of investors (usually high net

worth individuals and institutions who can buy a large quantity of shares). After

placing its shares with these investors, they (the investors) can sell them if they

wish, and the shares can now be traded normally on the stock exchange.

T




35

3. Another launch is the intermediaries offer. Shares are offered to some financial

institutions like large stock broking houses who act as intermediaries. The

intermediaries are allowed to sell the shares to their clients. Members of the

public cannot buy until permission is giving to trade the shares on the stock

exchange.

4. In an offer by introduction, the stock exchange grants permission for the

companies shares to be traded on it. This usually happens when the company has

a large number of shareholders and wishes to move from the second-tier

securities market to the first tier.

Subscription and allotment In an offer for sale, an investor is expected to read through the prospectus and fill

and send a subscription form (usually contained in the prospectus) for the shares.

Based on the number of applications received, and the number of shares available the

companies stockbrokers now decides who gets shares and how many. In other words,

they allot shares to the applicants. If the number of applications for subscription for

shares exceeds the available shares the offer is said to be oversubscribed. If it is

below it is undersubscribed. An investor’s application may be disqualified if it does

not comply with the stated rules of the offer. Allotment letters are sent to successful

applicants after the basis of allocation is decided. Those applicants who are

unsuccessful get their money back. The stock exchange fixes a date on which official

dealings in the shares will start.

Share certificate When shares are allotted to the investor a note will be sent indicating the number of

shares allotted. After some period a share certificate will be issued. This certificate is a

security, a proof of ownership of the shares in the company. If in future the

shareholder wishes to sell the shares, the share certificate must be surrendered to a

stockbroker who will forward it to the company’s registrar.




36

Underwriting a floatation A floatation is usually underwritten by an investment bank. This means that the

investor institution agrees to buy any shares that are not bought by the public. In this

way, the company selling the share is sure of getting its money. Examples of

investment banks are Investment Banking and Trust Company (IBTC), First

Merchant Bank Nigeria Ltd (FMBN) etc.

Rights issue When a company already on the exchange issues new shares to raise cash, those

shares are first offered to existing shareholders – the owners of the business in the

form of a rights issue.

How the rights issue works It is called a rights issue because shareholders have the first right to buy the new

shares. The company announces that it wants to raise a particular amount by creating

and selling new shares. The new shares are offered to shareholders in relation to their

existing shareholding. They are usually offered at a price below that of the existing

shares in the market, to give shareholders an incentive to buy up the new shares.

The offer is usually put in this way “XYZ company is offering by way of rights one

new share for every three held as at 5th may 2002”. It means shareholders have the

chance to buy one new share for every three they already own as at the day stated.

Because the number of shares in the market increases during a rights issue the price

of the company’s share in the stock market is usually adjusted downwards.

When a rights issue is in progress, the company’s share is ‘technically suspended’. Its

price will be pegged by the stock exchange, and will not be allowed to increase of

decrease until the rights issue is over.




37

Other ways of issuing shares Apart from the right issue, a company already on the stock exchange can generate

money by issuing new shares by placing. Just as the placing method described for

bringing new companies to the market, the new shares are sold directly to big

institutional investors. The company can also raise money by just offering new shares

to the market. During a public offering of a good company, take advantage of the low

share price to buy. Its share price can rise dramatically after the offering. A company

high in debt and offering new shares to raise money to pay of its debt may have its

share price fall lower than the offering’s selling price. Always look at the health of the

company before you buy.

Share buy backs Sometimes, it may be in the best interest of the company to buy-back its own shares.

Share buy-backs are usually profitable to investors. When a company buys-back its

shares in the stock market, the number of shares, in circulation decreases and the

price of its share rises. So whenever a company buys back its own shares, it is a

positive sign. Its shares become more valuable.

Takeovers A takeover occurs when a company gains control of another. Company A can

takeover company B by acquiring a controlling stake in it i.e. by buying 50.01% of

company B. During takeovers, shareholders of the company being bought, (in this

case, company B) profit from the situation. This is because company A will opt to

buy the shares of B above their current stock market value, to encourage the

shareholders of company B to sell it to them. Takeovers can occur through three

different routes

1. A cash offer: In this process, company A will write to the shareholders of

company B and offer to buy their shares at a certain price. If they accept, they

will take their profit and leave.




38

2. A paper offer: In this process, company A will offer their shares in exchange for

shares in company B. For example Company A can offer 2 of its shares, priced at

N20 each (total value N40) for 5 of company B shares priced at N6 (total value

N30) each. An investor who accepts the offer will make a profit of N10 on every

5 company B shares he exchanges.

However, there are some terms used to describe these takeovers -

If the directors of company A and B meet and decide that both companies should

join forces, it will be termed a merger. If company A tries to takeover company B

and B tries to fight them of, it is termed hostile bid.

If other companies are trying to takeover company B at the same time, the bid for

company B is said to be contested. After a takeover, company A usually pays of

some of company’s B employees and directors it will not wish to retain.




39

7. INVESTMENT STRATEGIES FOR ACTIVE INVESTORS

“The big profits go to the intelligent, careful and patient investor. The seasoned investor buys his shares when they are priced low, holds them for the long-pull rise and takes in-between dips and

slumps in his stride. Keep your mind on the long-term cycles and ignore the sporadic ups and downs.” - The late J. Paul Getty, once named by Fortune Magazine

as the richest man in the world.

ome of us ‘stockaholics’ would not want someone else to manage our investment.

We would want to do it ourselves. This active stock picking is fun and

rewarding. The active investor or active stockpicker can beat the professionals. Being

part of an investment club – a group of friends who come together regularly to

discuss their investments – will increase your chances. You can form one informally

or you can go for a registered body. One of the registered bodies in Nigeria you can

team up with is The Investment Club Network. You can check them out on the

web at www.ticn-nig.com.

“The average person can concentrate on a few good companies while the fund manager is forced to

diversify. By owning too many stocks they lose the advantage of concentration. It only takes a handful of big winners to make a lifetime of investing worthwhile.” – Peter Lynch

Ways of Analyzing Shares There are two main ways of valuing and analysing shares - Fundamental analysis

and Technical analysis. The Fundamental analyst believes that share prices are

priced in a rational manner based on economic information, industry news, and the

firm’s financial statement. The technical analyst believes that prices are largely

determined by supply and demand, even when demand may seem irrational.

Technical analysts make use of stock charts to follow the movement of shares. These

charts show the movement of stock prices on a time scale. They are usually plotted

S




40

on a semi-log graph. As an active stockpicker, you need to use both methods in stock

picking as they both have their advantages.

Fundamental analysis is divided into two main camps - value investing and growth

investing. Value investors look out for undervalued situations. They want to buy

bargains – buying companies when they are under priced. Value investors consider

financial statement information such as the net asset value, return on assets, return on

equity etc.

“Value investing means you buy nothing based on future value… no bets on new products, earnings or sales. You are trying to buy a $1 stock for 50 cents.” - Michael Price, Mutual Series Funds.

Growth Investors look for rapidly growing companies. Growth investors are willing

to pay more than may seem reasonable because they like a share’s future prospects.

They are buying future earnings that may or may not develop.

An important principle - Diversification This is an important concept used to reduce risk in investing. You should try and

diversify your investments so you own not less than 5 shares. As a general rule, out of

every five you pick one will be very great, one will be really bad, and three will

perform as expected. Never, ever, ever put all your money into only one share, except

if you have only a small amount to invest. The more your investment grows, the more

you should diversify. If you put all you money in just one or two shares, it’s like

putting all your eggs in one basket. If their prices crash, you stand to make great

losses.

However do not own so many shares you would not be able to follow their company

information. Over diversification is also dangerous. If you own to many shares you

cannot concentrate on the best ones. Consequently, your returns will be reduced. As

an active stock picker, it is wise to own not more than 12 shares. You share portfolio




41

should also contain at least one or two blue chip shares for stability. Growth shares of

smaller companies (which have high beta values) rise faster than the market, but also

fall faster than the market. (A share’s beta is a measure of its sensitivity to fluctuations

in the market).

You should also diversify your investment among different asset classes. Your

investments should be spread out in shares, mutual funds, bonds, businesses and real

estate. There is nothing wrong with owning a good mutual fund as well as buying

individual shares. A good rule is for 20 – 40% of your investment to be in very secure

investments like bonds and mutual funds. A professional financial planner can help

you plan your investment and finances. If you wish to invest in the Discovery Fund,

you can contact one at any branch of ARM Limited. Head office: 9, Bayo Kuku Road,

off Kingsway Road, Ikoyi, Lagos. Abuja office: 12 Missouri street, off Colorado

Close, Ministers’ Hill, Maitama, Abuja.

How to pick the right shares The four golden rules to follow in active investing are

1. Invest regularly (for example, every month or every quarter)

2. Reinvest dividends and capital gains.

3. Discover and buy growth companies with very good management.

4. Prudently diversify by company size and industry:

Read the financial papers like Financial Standard and Business Times. Come up with a list

of potentially attractive companies (their EPS especially and their relative strength in

the industry will guide you). Research each one, then sit down and review the data

and decide which stocks to choose. Here are a few ideas about how to go analysing

the companies -

Checklist Has the EPS of the company been growing by at least 20% in the last

five years?




42

Look at the five-year financial summary of the company and check whether the EPS

has been growing for at least 20% annually. You may forgive one year of reduced

earnings if there is a good reason. This rule helps you select only the best companies

– they are the only ones that can maintain this trend of results. This is one of the

most important rules to abide by and will help you select the best shares.

Is there a heavy demand or a sudden increase in demand for the

company’s products and services?

Know what the company does. One way to know how well a company is doing is to

look at its customer base. Are customers literally lining up to buy the company’s

products? Is the reception filled with customers? Sales drive earnings and earnings

drive share prices. In the long run there is 100% correlation between a company’s

share price and its earnings. Is the company producing or dealing in goods or services

for which there will be a continuing demand in the foreseeable future? You do not

want to buy a company whose products would be obsolete in the near future.

Does the company have any thing new – new and superior products

and services, factories, branches?

Successful new products and services boost company’s earnings which in turn boosts

its share price. Look out for opening of new factories and branches. This shows an

expanding firm

Does the company have seasoned and efficient management? Did it get

new management?

A change in the CEO of a company can cause a change in the fortunes of the

company. When Access Bank Plc got new management in 2002, its performance

changed. Its share price rose as the bank returned to profitability after months of

dwindling earnings. Companies run by efficient and experienced management

outperform others. This is one of the very important factors to consider when buying




43

a share. Many investors have been known to mop up a share simply because Alhaji

Dangote bought majority shareholding in the company and started managing it.

How much debt does the company have?

Look at the company’s balance sheet and find out how much debt it owes. Large debt

portfolios attract large interest payments. Avoid companies with huge debt.

Companies may go bankrupt and get liquidated when they can not meet their debt

obligations. Or it may weigh down the share price. One of the factors that has kept

the share price of WAPCO down between 2001 and 2003 is its huge debt burden of

over N3 billion.

Are the company’s account statements (balance sheet, profit and loss

statement) strong?

The strength of a company’s balance sheet determines how the company will respond

to one or two years of economic downturn. Only the strong survive the tough times.

Does the company have enough cash to keep it through the tough times? Some

companies also get into trouble when they run out of cash – take a look at the cash

flow statement.

How will the company be affected by the prevailing economic

conditions and government policy, now and in the near future?

Look at how government policy will affect the firms industry. With the deregulation

of the petroleum sector, petroleum marketing companies saw their shares triple and

quadruple. When the federal government scraped the Petroleum Trust Fund (PTF),

Longman Plc had a serious drop in earnings because PTF was one of its biggest

customers. Similarly the pharmaceutical companies witnessed a steady increase in

earnings because of the activities of NAFDAC. When the federal government

announced it would ban the importation of cement in the future, the shares in the

cement industry were boosted. If you know the factors that make an industry

profitable or unprofitable, you can improve your odds.




44

Is the PE ratio within acceptable limits?

Select quality companies and buy them at attractive prices. Not only must a

company’s earnings be growing at an acceptable rate, you must try to buy it at the

right price. A very important principle in investment is that “You make money when you

buy, not when you sell”. In other words, buy your shares at very good prices. A PE ratio

of around 5 to 10 is OK – the lower the better. However, a company whose PE is 0

may not have had any recorded earnings in the last financial year, so beware! That is a

danger signal.

Have reasonable dividends been paid regularly to stock holders?

A good company usually increases its dividend every year. When a company pays

dividends every year, it makes its shares attractive to investors. If a company misses

its dividend payments, find out if it was for a good reason.

Are company policies and operations farsighted and aggressive without calling

for unjustified and dangerous overexpansion?

A company that borrows money and expands too fast may run into trouble. In

addition, a company that is not aggressive enough, and finds itself in a highly

competitive sector may not lose out.

Is the price of the share breaking out into new ground?

Share prices usually have a range within which they fluctuate. When they a price

break-out occurs, they leave this range and reach a new high it has not reached

before. There is a tendency for the share price to continue to increase. These price

breakouts are usually preceded by large trading volumes (business done). Watch the

share trading volumes. They give you an idea of which stocks money is being

channelled into. Companies which show large trading volumes for a long time usually

have their share prices rise suddenly. You should own the share around the time it

breaks out. Don’t buy into it too late when it has already lost momentum.




45

Does the net asset value of the company exceed the stock exchange

value of the share?

The net asset value of a company is the amount shareholders would receive per share

if all the firm’s liabilities were paid and all its assets sold at their balance sheet value.

When the share price of a company is lower than its NAV, you have an undervalued

situation. If other factors are right, when you buy a company near or below its NAV

you are buying a very good bargain.

Look at the major shareholders in the company.

Be wary of investing in banks whose major shareholders are politicians. Savannah

bank, whose licence, was withdrawn, has been a painful example for this. Some

politicians may use the banks funds for political campaigns or the banks may be a

victim of political wars. Companies whose majority shareholders are state

governments, may also suffer from some level of bureaucracy and inefficiency.

Remember… � The latest stock market correction (or dip) is not a disaster but is an opportunity

to acquire more shares at low prices. This is how great fortunes are made.

� You have to be willing to be in the market for the long term. Be sure to keep the

money in. Think 5 years or more.

� Invest in well managed small growth companies. The share prices of small

growth companies move faster than the large heavy capitalized companies.

� Whenever a company declares a dividend or bonus share, the price is readjusted

downwards. Buying at these low prices will ensure you get a lot of shares for

your money’s worth.

� The stock market really is not a gamble, as long as you pick good companies that

will do well – companies with good management and products. Do not just buy a

company only because its price is low.

� You have to research the company before you buy it. Don’t just buy a company

because someone gave you a tip. Understanding the reasons for past sales growth




46

will help you form a good judgement as to the likelihood of past growth rates

continuing.

� Buying high-yield shares is good because it gives you a higher dividend, but you’ll

make money in growth shares because of their high appreciation.

� If a share goes down, know that it can go lower. One important point to

understand with shares is that one bad loss can destroy years of wins. So watch

out and be ready to sell at the right time.

� Hold no more stocks than you can remain informed on. Have an investment

notebook. In it, always write down the reason you are buying any share and the

price at which you are prepared to sell it and take your profit. Follow the stock

prices as often as you can, but do a thorough check up of the company every six

months and re-evaluate its prospects.

Investment Seasons Over the years, it has been noticed that share prices are usually quite low towards the

end of the year when most investors sell their shareholding for the festive season. In

the few months of the next year they pick up quickly. You may wish to time your

share buying towards the end of the year.

When to sell your shares

“Money talks I know. I heard it once. It said bye-bye.” – Anonymous

If your share falls to 10% of the price you bought it at, SELL IT. Look don’t even

think about it, just sell. Most people loose lots of money in the stock market because

they do not know when to sell (cut their losses). Like Warren Buffet, one of

America’s greatest investor’s once said, “An investor needs to do very few things right

as long as he or she avoids the big mistakes”. So don’t wait to consider if it will rise

again, just give a sell order. If a share falls to around 7% below the price you bought it

at, you can sell one quarter of it. If it continues falling you can sell another quarter. By




47

time it has falling to 10% of your original purchase price, YOU SHOULD HAVE

SOLD ALL OF IT.

Some of the shares you buy will rise, and some will fall. The secret to making

money in shares is to cut of the falling shares early. One way to sell your shares

to prevent major losses is to set a sell limit. This is sometimes called a stop order or

‘stop-loss’. When you set a stop order with your broker, the broker will automatically

sell your shares when they fall to the specified price. This will prevent you from

making huge losses. Not all stockbrokers provide this service, so you may have to

watch out and issue the sell order yourself at the right time.

If you buy a share you think will appreciate in the short term, have a price at which

you will sell it and take your profit. Don’t try to sell at the very top, because this can

almost impossible. Just sell it when it reaches your target. You can start by selling a

quarter, or a half. If it continues to rise you may hold on a little and sell the remaining

in parts. Don’t be too greedy.

Overtrading Stockbrokers make money by commissions on trades. There is a danger of loosing a

lot of money to commissions if you are constantly trading your shares i.e. selling a

particular share and buying another one. Do good research before you buy.

My final word to you is – whatever you do, make sure it is profitable. Don’t loose

money. Thanks for reading this book.




48

APPENDIX

Investment News

Find the latest Nigerian business and investment news at www.stockmarketnigeria.com

Discuss and share ideas with the investment community at www.stockmarketnigeria.com/forums

List of Stockbrokers

To find a current list of stock brokers in Nigeria, please visit

www.stockmarketnigeria.com/stockbrokers

You can also add a stock broker to this website for free!

Recommended Reading

We would like to recommend the following fantastic books for your investment

library.

The Richest Man in Babylon by George S. Clason Rich Dad, Poor Dad by Robert Kiyosaki

Rich Dad's Cash Flow Quadrant by Robert Kiyosaki Rich Dad's Guide to Investing by Robert Kiyosaki How to Read the Financial Pages by Michael Brett

Beating the Street by Peter Lynch The Intelligent Investor by Benjamin Graham

How to Make Money in Stocks: A Winning Strategy in Good Times and Bad by William J. O'Neil

You can find detailed reviews of these books at




49

www.stockmarketnigeria.com/books. If you have read any of these books why not write your own book review? Log on to

www.stockmarketnigeria.com/books

We at stockmarketnigeria.com have an ongoing competition to find out the best Nigerian investment book, (by a Nigerian author of course). Cast your vote at

www.stockmarketnigeria.com/author .

Internet Resources Discount Houses Kakawa Discount House Limited www.kakawa.com Express Discount Limited www.expdisc.com - You can check stock prices online on Express Discount’s website. It is loaded with information on the money and capital markets, but you would have to register first. First Securitites Discount House Limited www.fsdh.com Associated Discount House Limited www.adh-ng.com

Government regulators The Nigerian Stock exchange www.nigerianstockexchange.com - You can check stock prices on the NSE’s website. This website is loaded with quality information for the stock picker. The Securities and Exchange Commission www.secngr.org

Company information Nigerian Exchange www.ngex.com Has basic information on most quoted ompanies Unit trusts (Mutual Funds) Discovery fund www.armdiscoveryfund.com Investment Clubs The Investors Club Network in Nigeria www.ticn-nig.com Business Newspapers Financial Standard www.financialstandardnews.com




50

Date post:	17-Mar-2016
Category:	Documents
Upload:	qnet
View:	233 times
Download:	1 times

Guide to Investing in stocks

Documents