Sunday, November 04, 2007

CREATING WEALTH THROUGH THE STOCKMARKET

You can create mega wealth for yourself in the capital market as long as you learn to get your priorities right when it comes to financial planning. The stock market is now becoming popular in Nigeria and more investors are being attracted each day. Many individuals and companies are now developing interests in the stock market due to the benefits derivable from the market. But before diving into this opportunist’s market, you need to understand the basics of the market.

The Nigerian Stock Market

The Nigeria Stock Exchange serves as the trading floor (secondary market) for the buying and selling of securities (shares). There are more than 200 securities listed on the Nigerian Stock Exchange (NSE). Most of the companies have foreign/multinational affiliations and they represent a cross – section of the economy, ranging from agriculture through manufacturing.

Trading
An automated Trading System (ATS) is used with bids and offers now matched by stockbrokers on the trading floors of the Exchange through a network of computers. This occurs every business day from 11.00am till bids and offers have been executed (usually around 1.30pm).
Pricing
Prices of new issues are determined by issuing houses/stockbrokers, while on the secondary market, prices are made by stockbrokers only. The market/quote prices, along with All-Share Index, are published daily in the Nose’s Daily Official List, the NSE's CAPNET (an internet facility), Newspapers, and on the stock market page of the Reuters Electronic Contributor System.
The All-Share Index
The Exchange maintains an All-share Index formulated in January 1984. Only common stocks (ordinary shares) are included in the computation of the index. The index is value-relative and is computed daily.
Clearing, Delivery and Settlement
Clearing, settlement and delivery of transactions on the LSE are done electronically by Central Securities Clearing System (CSCS), a subsidiary of the Stock Exchange. The CSCS Limited also referred to as the "clearing house" was incorporated in 1992 as part of the effort to make the Nigerian stock market more efficient and investor-friendly. Apart from clearing, settlement and delivery, the CSCS offers custodian services.

WHY INVEST IN STOCKS?
There are lots of benefits due to shareholders for buying shares:1. Capital gains, as market prices of the shares increase.2. Dividends, which is a part of the company's profit.3. Bonus issues, which are paid from company's reserve to existing shareholders.4. Use of share certificate or CSSC statement as collateral for obtaining loan from banks.5. Right to attend meeting of shareholders and participate in the deliberation as voting members.
WHAT ARE YOUR INVESTMENT OBJECTIVES?

What really do you want from the stocks that you are investing in? You need to decide on your investment objectives before you spend a kobo on shares. There are a thousand and one questions you need to answer before investing.
What is it that you want to achieve? Is it to make quick money from your investment in shares? Is it to prepare for your financial freedom?Is it to become a shareholder in the company one day? What is your appetite for risks? Are you a conservative investor, who wants to play it safe like that man in the parable of talent who hid his master's money in the ground?Is the money you are investing the one you can afford to lose?
You have to decide whether you are investing long term or short term.

STARTING AN INVESTMENT

Choose a good stock broking firm.
Open a stock brokering account with the broker.
Communicate your investment objectives to your broker.
Anytime you buy shares, ensure you collect a contract note from your broker. This serves as evidence from the broker that he has bought or sold your shares.
Through your stockbroker, dematerialize all shares bought through the primary market by converting them to CSCS based shares.
Monitor performance of shares held regularly.
Regularly reconcile your valuation report from your broker and collect your CSCS statement regularly.
Make sure you receive your dividend warrants and bonus shares regularly.





GENERAL RULES TO MINIMIZE RISKS

Set your investment objectives
It is amusing that when people want to buy cars, they ask all the necessary questions. They decide ahead the make of the cars they want, the age, the engine capacity, even the colour? But when it comes to investing in shares, they go in without any pre selection criteria.

Engage the services of a good stockbroker
Yes, you need a broker, the percentage charge by law is (4.5%) of your money either going in (about to buy) or coming out (when you have sold). The 4.5% does not belong to the broker alone; part of it goes to the NSE, CSCS etc.

Invest in Companies you know
Educate yourself. Know the company that issues the shares. Analyse their annual reports. Know what is going on inside the company. As one of my friends put it, you must know as much information on the company as if you are a director. Invest in educating yourself today.

Take personal responsibility
You should be personally responsible for the shares you invest your money in? You should set the rules to guide you on the company to pick and you should set another rule to guide you on when to bail out of that share if it is no longer meeting your criteria. A lot of investors get so sentimentally attached to a stock that they refuse to act if the share price if falling and by implication watching their money go down the drain. This is financial illiteracy at its best. I wonder why people can't take a decision on the company if it is not giving them the result they expect. The way to be a wise investor is that even if your father is the chairman of the company in which shares you put your money, take a firm decision if the share is not giving you the expected result.

Have adequate knowledge of the market
Monitor prices and financial news closely.

Buy Low, Sell High
Timing is an important factor to consider when investing in shares. You need to buy shares when they are at their lowest level and sell when they are at their highest level. The possibility of recording huge losses is very minimal when this is done.
Switching portfolio is another strategy. It involves selling stocks which are considered to have reached their peak and buying others that maintain low prices.

Set entry and exit criteria
Setting entry and bail –out rules is particularly very important. Do your due diligence on any company you want to invest in before you part with your money. There is nothing that says that you must invest your money if you don't have a good company to buy. It is your money. It is your life. You should be the chief executive officer of your financial future.

Never get Emotional
The stock market does not care who you are and what you do. You must be cold blooded when you are deciding to select a stock in which to put your money. The stock market has a life of its own. It follows a certain set of rules and if you violate these rules, you will burn your fingers. Most people invest in some shares just because others are buying the shares. This is not a good enough reason to invest in stocks.
Don’t be greedy
The stock market follows some rules and only those who have taken their time to study the rules can hope to profit from the market. Many people burn their fingers because along the line, they get greedy. They always hope that the price of the stock they invest in would go further up tomorrow or would stop the slide the next day. So they keep watching until their valuable investment turns into a mere piece of paper. This is how wise investors behave. They are comfortable with making small profits regularly and cutting their losses quickly. A stock broker once told me that he does not expect to make more than 30 per cent returns on any investment in shares. So any time his stock hits a 30 per cent return he sells immediately, wait for another opportunity to buy cheaply. If it is in the same stock, he watches it again, once hits between 20 per cent and 25 per cent he sells. With this, he believes he can achieve more than 100 per cent return in a particular stock in one year. But to be successful in this strategy you must know the stock you are investing in inside out and be able to predict its cycle.


STEPS FOR ANALYSING A COMPANY
1. Does this company have a product or service that no other company in the country has? 2. Can I explain what this company does clearly to a 10yr old? 3. From the current earnings of the company, how long would it take for it to pay of its debt (liabilities). The maximum period should be less than 3yrs 4. Do the earnings over the last 5-10yrs show a steady, strong upward trend? If no for at least the last five years, it doesn’t qualify.
5. Is the company an expert at what it does? Does it dabble in other areas where it has no expertise? If they dabble, it’s a bad sign. Dabbling involves operating subsidiaries whose business is far removed from that of the main company. 6. Does the company operate a share buy back policy? 7. Has retained earnings been put to proper use (reflected in EPS increase)? A consistent increase in EPS for at least the last 5 years is necessary. EPS = total earnings/total shares.
8. What is the company average return on equity? 9. Is the company return on total capital consistently high? (ROTC=Earnings/capitalization) 10. Can the company easily adjust its product/service price to compensate for inflation? 11. Is a large amount of money needed regularly for research, or equipment update? Companies that need to spend lots of money in Research & Development cut down on profits. Simple companies are the best bet. 12. How does the rate of return compare to govt interest rate on bonds? The highest govt rate on bonds is less than inflation rate. It’s about 14%. 13. Using current average rate of return, make a projection on how much growth can me expected.
Use the formula FV= PV ( 1+ i )n
FV= Future Value, PV= Present Value, i=interest rate n=period

The truth is, all stocks will do well in the long run as long as this fundamental analysis is carried out right, but how do you take advantage in the short run? That’s where the technical analysis comes in and then you have to understand the peculiarity of the Nigerian stock market.

A little rumour can make a stock price soar in a span of one week. Check out the case of IBTC when there was a rumour of their merger with Stanbic Bank, the price went from about 5 naira to over 7 naira in a week. Also take the case of Ecobank's merger with First bank, the price of Ecobank went from N5 to over N9 even after the one for one bonus declared, whereas, people have made millions out of that. Also, take the case of the Cement company of northern Nigeria (CCNN), the company had been making a loss for sometime now, but because of the pressured demand in the industry as a result of the ban on importation of cement and the share price increase of its peers in the industry, it rubbed off on the stock too despite its poor fundamentals. The stock went from N4 to N21.57 in months!!!

The question now is, does Ecobank or CCNN have all the qualities listed in the analysis? The answer is NO! And did people make money or not in a span of weeks/months? The answer is a big YES! As much as the short run is very risky, those who can take great risks have cashed out a lot richer than before and of course some have got their fingers burnt.

INVEST WISELY, BUT BE CAUTIOUS!





Some useful links:
Here you can get all the lists of stockbrokers and there websites. http://www./Banking_and_Finance/Stockbrokers.html

The Nigerian Stock Exchange Website:
http://http://www.thenigerianstockexchange.com/

http://www.nigeriabusinessinfo.com/

http://www.smartinvestorafrica.com/

http://www.stockmarketnigeria.com/

http://www.investopedia.com/

http://www.karakataonline.com/