STOCK INVESTMENT IN NIGERIA: ITS BENEFITS AND PROCESS

By

Kabiru Maitama Kura, B.Sc., MBA, AMNIM, MIMC, Student Member-CIS

Department of Business Administration and Management,
Federal Polytechnic, Kaura Namoda,
Zamfara, State.
E-mail: <km_kura@yahoo.co.uk>

Abstract

Stock investment, which many people referred to as investing in shares is one of the
topical issues among, businessmen, employees of both public and private sectors,
students, farmers and even political office holders. In Nigeria, this organised system
of investment has gained acceptance longtime ago, in western part of the country.
Thus, this paper aimed at discussing the concept of stock investment in Nigeria. The
paper also explores some of the benefits of stock investment, among others include:
return on investment by way of dividend payment; bonus issue; capital appreciation;
use of share certificate/CSCS Statement for collateral and ability to consummate
timely trade on securities of investors as at when required. The data for this paper are
mainly from documentary sources. The paper concludes that in Nigeria, the only
obstacle to stock investment is the low level of investors’ enlightenment on the
benefits of the entire system, which has greatly affected the acceptance level
negatively. The paper recommends that the regulatory agencies like the Nigerian
Stock Exchange and Securities and Exchange Commission should continue to
enlighten Nigerian especially, using major Nigerian languages on the benefits of
stock investment.

Being A Seminar Paper, Presented at the School of Business and Management

Studies of Federal Polytechnic, Kaura Namoda, Zamfara State, held between 22nd
and 223rd July, 2008 at Yahaya Shantali Auditorium, Main Campus, Federal
Polytechnic, Kaura Namoda.
Introduction

Securities are created and issued by corporate bodies and governments, which

are in need of funds to finance expansion or development projects. For instance,

Wazobia Plc, a manufacturing concern needs to expand its facilities to accommodate

present and anticipated consumer demand as well as replace aging or obsolete

equipments. It is however, short of internally generated funds (retained earnings) to

undertake the projects require long gestation and payback periods, money market

facilities which have short tenure would be inappropriate funding sources. The company

would be left with one possible option, that is, to access the capital market if it meets

the requirements for entry. This could be done by issuing shares and/or debt instruments.

(Securities and Exchange Commission, 1999). Thus, capital market is a segment of financial

market that is responsible for mobilizing and channelling long term funds into productive

investment such as fixed assets. The investments in capital market are at longer period of time,

which are held for a minimum of five years.

Moreover, the term securities consist of stocks and bonds. It is not possible in this paper to

cover all aspect of securities. Therefore, this paper shall limit itself to stocks only (i.e. shares).

Theoretical Framework

Fischer and Jordan (2005) see investment as a commitment of funds made in

the expectation of some positive rate of return. If the investment is properly

undertaken, the return will be commensurate with the risk the investor assumes.

Similarly, an investment is the current commitment of money or other resources in the

expectation of reaping future benefits. For example, an individual might purchase shares of
stock anticipating that the future proceeds from the shares will justify both the time that
 her money is tied up as well as the risk of the investment. You sacrifice something

of value now, expecting to benefit from that sacrifice later. (Bodie, Kane, and Marcus,

1998).

Distinction between real assets and financial assets

According to Bodie, Kane, & Marcus (1998) real assets are assets used to produce

goods and services. In contrast to such real assets are financial assets, such as stocks and

bonds. Such securities are no more than sheets of paper (or entries in a computer) Financial

assets are claims to the income generated by real assets (or claims on income from the

government). If we cannot own our own auto plant, we can still buy shares in General Motors

or Toyota and, thereby, share in the income derived from the production of automobiles.

Definition of Stock

In simple terms shares is ownership in share of a corporation. According to Ahmed

(2008) securities as stocks and bonds. According to him, a stock represents a share, or

percentage, in a corporation’s profits and assets. By purchasing stock an investor is

buying a percentage of ownership in a company.

Different Types of Stock

There are two main types of stock or shares, namely; ordinary shares and preference shares.
Ordinary shares according to Nwiwu, Ya’u, Ezeocha, Ezima and Uzoigwe (2007) this
form that part of capital structure of the business contributed by the common stock
holders .For a new company it is called venture capital but in the old companies it is
called equity share capital. Ordinary or equity shareholders ordinarily own the
business, so all reserves belong to them. They have the right to votes in the company.
The shares are non- redeemable even though transferable. However, they have no
fixed rate of dividend since rate depends on the level of profitability,
 company liquidity and management discretion. On the other hand, Preference

shares are the hybrid or bat of financing because they exhibit the tendencies of both

equity and debt at the same time. They have a fixed percentage dividend before any

dividend is paid to the ordinary shareholders.

Share Certificate

Nwaiwu (2004) 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.

Nigerian Investments and Securities Law Reports (2004). Generally, securities in the

market are available in either of the following two (2) forms:

i. In certificate form; and

ii. In dematerialized form

When a security is presented in a certificate form, the selling agent needs to verify the
signature of the holder and the validity of the presented certificate(s) with the Registrar to the
company, after which it could be deposited for sale or any other form of transfer in
dematerialized form into the account of the beneficial owner held with the CSCS.
Consequently, any subsequent sale or transfer of these securities can validly be undertaken
without any need to revert to the Registrar. It therefore follows that securities held in the
CSCS account of any holder are deemed to have undergone the necessary verification and
confirmation with the Registrars and therefore the holder is rightfully accepted as the true
beneficial owner of the securities reflected in his account with CSCS. Thereafter,
 the only proof of ownership of the said securities that is available to the

beneficial owner is the CSCS statement of account issued to him.

Benefits of Investing in Shares

According to Kofa (2004) there are numerous benefits accruing to a

shareholder who invests in shares. Such benefits include:

i) Return on investment by way of dividend payment (share of profit by the

company on each share owned by the shareholder. This of course depends on

the number of shares held by the shareholder. The dividend declared by the

company’s Directors must however be approved at the company’s Annual

General Meeting (AGM).

ii) Bonus issue, this is an additional share given to shareholders based on the

number of shares owned by each shareholder free of charge at a ratio approved

by the Board of Directors/Management and ratified at the company’s AGM.

iii) Capital appreciation; this is an increase of share price over time. The value of

company share increases due to performance and demand/supply factors. That

is, for example, unit price of share purchased today at N10.00 could be N20.00

one year after, due to market forces.

iv) It can be used for security/collateral for loan purposes. Share certificates or

statements are acceptable as good collateral for loans by banks and other

financial institutions.

v) Pressing immediate needs could be met without seeking any bank/individual

financial assistance by disposition of shares.

Risks associated with stock investment

Elakama (2004) emphasized that there are no guarantees when it comes to individual

stocks. Some companies pay out dividends, but many others do not. And there is no obligation to

pay out dividends even for those firms that have traditionally given them. Without dividends an

investor can make money on a stock only through its appreciation in the open market. On the

downside, any stock may go bankrupt, in which case your investment is worth nothing.

Similarly, Securities and Exchange Commission (1999) like other forms of

investments, there are risk/cost associated with investing in the capital market. There are

also obligations on issuers of securities. The risk to investors includes possible

unfavourable rate of return owing to depreciation in market value and/or nonpayment

of dividends. It could also involve possible loss of investment should a company go burst.

Nature of capital market

At this point, it is important to recognise the nature of capital market. Sulaiman (1999)

defines capital market as a network of interrelated institutions governed by operational guidelines

which permit the sale of equity and long term debt

Elements of the capital market

There are three identifiable features of a capital market. These are: the instruments;

the market place; and the participants.

a) Financial instruments

Financial instruments are the investment products, created to ensure the smooth and easy
transfer of funds in the capital market. These instruments, generally known as securities
are financial assets, which represent either debt or ownership. The instruments have
various features depending on their type between the primary and secondary markets is the
fact that proceeds of sale of primary securities go to the issuer (company or

government) whereas in the secondary market, proceeds go to the investor.

b) The market place

The capital market is divided into two separate but closely-related segments known as the

primary and secondary markets. Securities and Exchange Commission (1999).

Primary Market a forum where new shares are offered to both existing

shareholders and general public for purchase. Primary market offers can either be

made directly by the company to increase its paid-up capital or through privatization

of Government holdings, technically called divestment of government shares. On the

other hand, Secondary Market is a market where existing shares are traded (sold and

bought). Trading of shares at secondary market takes place on the floor of The

Nigerian Stock Exchange. The Stockbrokers buy and sell shares on behalf of their

respective clients. Essentially, the Stockbrokers are the dealing member firms

licensed by both the Nigeria Stock Exchange (NSE) and the Securities and Exchange

Commission (SEC) to deal on shares and offer other services to the investing public.

(Kofa, 2004).

c) Participants in the Market

To facilitate the saving and investment process in any economy, financial

intermediaries must exist and in good number. The financial intermediary is essentially a

middleman who pools funds form savers and passes on such funds to those in need of

them. An intermediary is a specialist) professional) in his line of business and thus, heavily

relied upon by his clients to make good investment judgement on their behalf or provide

professional advisory services to them. The capital market has a wide array of

intermediaries performing various intermediation functions. They include:

i) Issuing Houses: These are institutions which assist corporate bodies and

governments to raise long-term funds by packaging security issues for

subscription on their behalf. The issuing house by this function plays a central

role in the issuance process, and in industrial development. The issuing house

as the principal agent of and adviser to the issuer has the responsibility of advising

its clients on the most appropriate instrument and method of sourcing the

required capital. It also has the responsibility of assembling and coordination

all other specialists required in the issue process, ensuring that statutory and all

other requirements are met, and that the issue is properly packaged and

successfully concluded. Packaging would include pricing of the securities,

preparation of the prospectus and other documents, as well as marketing and

distribution of the securities.

ii) Stockbrokers/dealers: These are major players in the secondary market.

Stockbrokers are the only persons permitted to transact business on the floor of a

stock exchange or on the over-the-counter market. A stockbroker, therefore, stands

between the seller and buyer of registered securities, making it possible for both parties

to realize their desire to buy or sell securities. To act as an agent of the public or deal

in his own account, a stockbroker/dealer must be registered by the statutory regulatory

agency (Securities and Exchange Commission) and licensed by the stock

exchange. As an agent of his client, the stockbroker is under obligations to transact

business for him at the best price obtainable in the market.

iii) Investment Advisers: These are institutions/persons registered by the statutory

regulatory agency to provide investment advisory services to their client for a
fee. Investment advisory services are incidental to stock broking and issuing house business.

iv) Portfolio Managers: These are institutions registered by the statutory regulatory agency

to manage the portfolio of clients. Portfolio management entails the receipt of funds,

sometimes very large sums, to be invested by the portfolio manager. Most often, the choice of

investments are left to the manger who however must send periodic investment

statements, to his client. In exercising his discretion, the manager must at all

times, consider the best interest of his clients. Both investments advisory and

po rt f ol i o management services require extensive economic/market analyses to guide

investment decisions and advice to clients.

v) Registrars: These are institutions employed by companies to keep comprehensive registers

of their members (shareholders) and creditors. In addition, they arrange annual general and

extra-ordinary meetings for their clients; distribute stock/share certificates, annual

reports, dividend warrants and notices of shareholders' meetings. In cases of issue over-

subscription, registrars dispatch surplus monies to subscribers.

vi) Trustees: These are important participants in debt issues and collective investment schemes

such as unit trust. The trustee protects the interest of investors in debt

instruments by monitoring and ensuring the fulfillment of the term of the trust

deed.

vii) Receiving Agents: These are banks and stockbroking firms appointed by the

issuing house to serve as centers for the distribution of offer applications forms,

as well as for the receipt of subscriptions monies on behalf of the issuing house, for

a fee.
viii) Receiving Bankers: These are banks designated by an issuer to receive

proceeds of an issue on its behalf.

ix) Solicitors: These are law firms which either represent the issue or the issuer. In

practice, two solicitors are required in a public issue of securities. These are the

solicitor to the company (issuer) and the solicitor to the issue. The solicitor to the

company among other things ensures that the memorandum and articles of

association of the company are in consonance with legal requirements of a public

company, and effect amendments where necessary. The solicitor would

examine issue relating to the authorized capital, ensuring that it can

accommodate the issue being proposed. Where a debenture stock is to be

floated, the solicitor would make sure that the company has the borrowing power

to do so. Generally, it is the duty of the solicitor to the company to ensure that

the company complies with the provisions of the corporate law of the country

(e.g. the Companies and Allied Matters Decree 1990 in Nigeria).

x) Auditors: These are the existing auditors of the company. In their capacity as the

auditors, they provide historical perspective on the accounts of the company

for inclusion in the prospectus.

xi) Reporting Accountants: These are firms of accountants which provide

independent assessment of the accounts of the company. They review

management forecast and examine the reasonableness or otherwise of such

forecast. Based on their findings, the reporting accountants can recommend

adjustments to the management forecast. They also prepare statement of

indebtedness of the company, among other things.

Prerequisites to successful investing in stock

a) Selecting a Broker

According to Fischer and Jordan (2005) the investor's first step in establishing a

satisfactory relationship with a broker is to choose a firm that is suitable for his needs and to

select a representative of the firm with whom he can work. In practice separating the two

choices is hard, for if one has chosen a satisfactory firm but is unhappy with the

representative, it is embarrassing to shift one's account to another representative within

the same firm. The brokerage firm should be a well-known and long-established

institution. In selecting a firm an investor can ask for recommendations from his bank or

from friends whose opinions he trusts.

b) Opening a Brokerage Account

This is an investment account, which is opened with the CSCS through a

stockbroker. When this account is opened a client is issued with two numbers. The

first number is called ’CSCS No.’. It is computer-generated numbers allocated to a

new shareholder. It is unique to each stock-broking firm. Although a shareholder can

have as many accounts as the number of stockbroking firms he uses. Furthermore,

CSCS No is alphanumeric which is used if you have to fill in public offers if you

desire shares allotted to you to be credited to your account.

Investors Account No. is numeric which is used internally on the floor for trading. In
other word, investor’s No. is the CHN represents the Clearing House Number
assigned to every shareholder at the first point of entry into the CSCS system. He/She
must have completed the CSCS -- R005 – Shareholders Particulars Form.
 They are to provide the same CHN to all subsequent stockbroking firms they

may have transactions with for ease of reference.

Other Prerequisites to successful investing in stock include opening a Bank Account,

access to Post office Box (P. O. Box), access to Phone and active E-mail Address.

Process of acquiring shares

According to Nigerian Investments and Securities Law Report [NISLR] (2004) shares

could be acquired by six (6) main modes;

1) Public offer;

2) Rights offer;

3) Bonus;

4) Nominal transfer; i.e. Transfer of share by way of gift.

5) Transmission from a dead relation or friends or collective investments or investments

previously held under a corporate name for a beneficiary; and lastly

6) By purchase on the secondary market.

In general, a prospective investor who wishes to purchase shares on the secondary

market is expected to approach a stockbroker such as Newdevco with a request to

purchase or to invest in shares at a secondary market. In response, the stockbroker

asks the prospective client which stock/shares he/she intends to purchase. Where the

client has a selected stock in mind, the stockbroker executes the order according to the

expressed need or interest of the client/customer. (Kofa, 2004).

Kofa (2004) added that in a situation where a client does not know which stock/share
to buy, the stockbroker explains and advises the client accordingly in detail the shares
to invest in. Consequently the stockbroker gives the client the necessary share transfer
forms and Central Security Clearing System (CSCS)
 (particulars of shareholder) for completion. These documents are used to

lodge the shares at Registrars Department of the company and also to open the new

CSCS account for the client. The shares requested by client to be purchased are

normally paid for by Bank Draft or physical clash to a stockbroker, who will in turn

given an official receipt for the draft value or cash collected. Thereafter, the

stockbroker purchases the shares as requested by client. Whenever the transactions

are fully consummated, the stockbroker shall forward the CSCS statement of stock

position to the client as evidence of ownership of such shares.

Benefits of Central Security Clearing System (CSCS)

Nigerian Stock Exchange (2008) states the benefits of CSCS to the operation

of the Nigerian Stock Exchange as follows:

a) To Investors

 Investors statements of stock position are issued every quarter free of charge

or on demand for =N=100.00.

 Use of stock position as collateral for loan facility after T + 3 settlement cycle

i.e. 4 working days. In effect, a statement of stock position is obtainable from

CSCS 4 days after transaction.

 Investors can speculate more and take advantage of capital appreciation in

their investment because of the T+3 settlement cycle.

 Reduced risk of loss of certificates.

b) Quoted Companies

 Huge cost associated with the production of share certificates for transaction

through the secondary market has been significantly reduced.

Before CSCS, a single transaction on a certificate led to the cancellation of the

certificate and the issuance of as many as ten (10) certificates depending on
  allotments made. This is no longer so since few shareholders request for

certificates.

 Indeed, of the 400,000 shareholders who use CSCS system now, only 2,200

shareholders have requested for certificates to date.

 Amalgamation/consolidation of several accounts for a shareholder on the

register leading to reduction of cost to the company.

c) Stockbroking Firms

 Prompt Inter-member money and stock-settlement are assured.

 The problems associated with delivery of shares are minimize

 Increased efficiency and profit

 Reduction in operational cost.

Disposal of Shares

According to Kofa (2004) a shareholder who wishes to dispose his/her shares

is expected to go to a licensed stockbroker only. A Stockbroker is seen as the

authorized agent approved by the government to deal in shares, especially in the

purchase or sale of shares on behalf of an individual, group or company. The original

hare certificates or CSCS statement will be tendered to a Stockbroker who will issue

the relevant forms for completion by the shareholder and then forwarded to company

Registrars for signature verification. That is, confirm the ownership of the shares in

the case of share certificate. However, in the case of CSCS statement, the stockbroker

verifies his client’s signature. After the confirmation of signature, the share is taken to

the floor of, say, the Nigerian Stock Exchange for appropriate disposal. After the

disposal contract, a note shall be raised appropriately and the net proceeds is remitted

to the shareholder after commissions and statutory charges are deducted as approved

by the Nigerian Stock Exchange.

Recent Development in the Nigerian Capital Market

There are two recent developments in the Nigerian Capital Market. First, is the

launching the e-dividend payment system which would subsequently solve the

problem of unclaimed dividends by the Securities and Exchange Commission (SEC).

According to Olamijulo (2008) the e-dividends payment system refers to the

payment of dividend due to shareholders through electronic means into the

shareholders’ nominated bank accounts. It implies same day clearance for dividend

payment. He added that the system would enable shareholders receive their dividends

on the same day, thereafter a confirmation letter of the dividend payment would be

dispatched by the registrar. The e-dividend payment system would minimise cases of

unclaimed dividends, eliminate dividend loss in transit, the forfeiture of dividends in

the future and enhance the ability of shareholders to immediately access and utilize

the proceeds of their investments.

Secondly, is the launching of e-allotment which will be fully operational from

January 1, 2009. Ahmed, (2008) reported that the system is aimed at enabling the

achievement of a certificate-less system in the Nigeria capital market.

E-allotment of shares as it is known is a process of direct credit of approved

allotment on offers to the CSCS account of shareholders, as against the conventional

issuance of share certificates. It is a process which will aid the achievement of

certificateless transaction in the Nigerian capital market. (UBA Registrars, 2008)

The e-allotment is introduced as a result of postal services delays, and "the

need to reduce costs in printing and dispatch of share certificates as well as to enable

all investors in public offers speedily allotted shares."

Conclusions and Recommendations

It can be concluded that in Nigeria, the only obstacle to stock investment is the

low level of investors’ enlightenment on the benefits of the entire system, which has

greatly affected the acceptance level negatively. Therefore, it is recommended that the

regulatory agencies like the Nigerian Stock Exchange and Securities and Exchange

Commission should continue to enlighten Nigerian especially, using major Nigerian

languages on the gains of stock investment.

References

Ahmed, I. (2008, July2). Capital Market: Securities hit 2tn in 2007. Daily Trust. p.33

Bodie, Z., Kane, A. and Marcus, A. (1998). Essentials of Investments. (3rd Ed.).
Boston: Irwin/McGraw-Hill.

Elakama, L. M. (2004, March 10). What you need to know about the stock market.
Business Day. p.24.

Fisher, D. E. and Jordan, J. R. (2005). Security Analysis and Portfolio Management.

(6th Ed.). New Delhi: Prentice-Hall of India Private Limited.

Investments and Securities Tribunal (2004). Nigerian Investments and Securities Law
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Kofa, B. T. (2004). Investment in Share: The Nigeria Scene. Management Digest.

Volume 1, Number 1, 27-29.

Nigerian Stock Exchange (2008).Benefits of CSCS Ltd. Retrieved from

http://www.nigerianstockexchange.com/cscs_benefits.jsp

Nwaiwu, I. C (2004). The Beginner’s Guide to Investing in the Nigerian Stock

Market.
Retrieved from www.stockmarketnigeria.com/forums
Nwiwu, J. L., Ya’u, N., Ezeocha, G. M., Ezima, U. L. and Uzoigwe, G. (2007).
Business Finance. Lagos: Vinez Communication.

Olamijulo, S. (2008). SEC launches e-dividends to eliminate dividend losses.

Retrieved from http://www.businessdayonline.com/economic-watch/market-
outlook/11519....

Securities and Exchange Commission (1999). A primer on the Capital Market. (Revised Ed).
Abuja: Research and Market Development Department of the Securities and Exchange
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Stephen, C. M. (2007). Understanding how to open a New Stream of Income via Stock Investment.
Adamawa: The Stock Millionaires Solutions.

Sulaiman, S. (1999). Understanding Finance and Investment. Kano: Samarib

Publishers.

UBA Registrars (2008). Investors need enlightenment about CSCS Account.

Retrieved from
https://www.ubagrouponline.com/ubaregistrars/opencms/ubaregistrar/mod
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 Appendix I

Recommended Books and Websites

www.nigerianstockexchange.com

www.stockmarketnigeria.com

www.cscsnigerialtd.com

www.military.com/Finance

www.cashcraft.com