Beruflich Dokumente
Kultur Dokumente
com
Kelechi Ezeribe
Ugochi Akwiwu
Emeka Edeh
Nkiru Ohale
Chukwudi Agagwu
Azuka Okafor
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Contents
Recommended Reading 48
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“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
W 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.
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.
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300
Millions
Amount In Naira
250
200
150
100
50
0
18
22
26
30
34
38
42
46
50
54
58
Years
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.
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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
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risk tolerance, or is not interested in buying individual shares, is safer buying into a
mutual fund (unit-trust).
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S 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
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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%.
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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
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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.
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“I want to be so rich, that when I write a cheque, the bank will bounce”
– Robert Allen in “ Multiple Streams of Income”
A 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).
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.
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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
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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.
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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.
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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.
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The share categories are not strictly defined nor are they exclusive. A growth share
can also be a blue chip.
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
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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.
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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
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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.
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“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.
T 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.
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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.
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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.
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.
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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
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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.
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“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
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
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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.
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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.
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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%
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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.
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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.
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T 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.
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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.
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.
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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.
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.
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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.
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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.
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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.
S 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
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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.
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
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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.
Checklist
Has the EPS of the company been growing by at least 20% in the last
five years?
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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.
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
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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.
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.
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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.
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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
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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.
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
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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.
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APPENDIX
Investment News
List of Stockbrokers
Recommended Reading
We would like to recommend the following fantastic books for your investment
library.
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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
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
Investment Clubs
The Investors Club Network in Nigeria www.ticn-nig.com
Business Newspapers
Financial Standard www.financialstandardnews.com
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