In the last article, we talked about investing in Contractual Savings and Mutual Funds. Today we will focus on Common(Ordinary) Stock/Equity/Shares.
Corporations raise funds by issuing shares of the company to the public. Equity represents ownership of the firm that issued it. This means that if you buy the shares/stock of a company, you own part of the company.
Therefore, you have a claim to share in the company’s net profit/income and assets of the firm. All common shareholders have the right to vote in the firm’s annual general meeting, thereby contributing in the firm’s decision making. Equity has no maturity date. A share holder can hold the shares as long as he/she wishes to.
How do you make money from equity?
A shareholder can earn profit from stocks in two ways:
- Capital gain – By selling the shares when the prices rise above your cost. For example, you bought 1,000 units of Access Bank shares at N6 (cost = 6 × 1000 = N6,000) and you sold it at N7 (sales = 7 × 1000 = N7,000).
Therefore, capital gain = N1000. It is important to note that there are buy and sell charges that are involved in every transaction. The percentage of these charges varies between stockbrokers.
- Dividend – payment of dividend by the firm either cash dividend or share bonus to the shareholders. For our example above if Access bank pays a dividend of 50kobo per share, then you will get a total dividend of 1000 × 0.5 = N500 if you hold the shares until the dividend qualification date without selling it.
However, dividend is subject to 10% withholding tax. Therefore, you will receive N450 as your dividend.
Some companies give share bonus to the shareholders. The most recent example was Julius Berger Plc (JBERGER). It announced a share bonus of 1 share for every 5 ordinary shares plus N2.75 per share dividend for every 50k ordinary share held at the qualification date (29 May 2020).
This means that if you have 1,000 units of JBERGER share on the qualification date – you will get additional 200 units of shares. Therefore, you will have total of 1,500 units plus N2,750 naira (1000 × 2.75) as dividend.
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Although, due to the Covid-19 impact, the company revised the dividend proposal downwards to N2.00 per share. However, the share bonus remained the same. Thus, using the above example of 1,000 shares, you will now receive a dividend of N2,000 plus the 200 units of shares.
Risks Involved
Buying of equity/stocks is regarded as a risky investment, because of the fluctuation in prices. This movement in prices depends on the economic conditions and the firm’s financial performance.
Shareholders are risk bearers, in the event of firm’s liquidation or bankruptcy, shareholders rank lower than the debt holders (bond holders). This means that equity holders are most likely to lose their investments if the company ceases operation.
For example, defunct Skye bank that ceased operation in 2018 and was taken over by Polaris Bank, until now the shareholders of Skye Bank have not received any information regarding the status of their shares. Also, in February 2019, Fortis Microfinance Bank declared bankruptcy.
Read more: The International Finance Corporation (IFC): Project/Investment Cycle
Hence, it is important to do your due diligence when investing in equity, to know more about the company you intend to invest in.
Firms pay dividends to shareholders from their profit or retained earnings, however they are not under any contractual obligation to pay regular dividends to shareholders. It depends on the success of the company.
Announcement of dividend can push share prices up or down depending on the dividend yield.
If the dividend yield is high at the current price the share price will increase. For example, when Julius Berger Plc first declared the N2.75 dividend plus share bonus on 16 March 2020, the share price was N22.15 per share. Dividend yield of 12.41%
This dividend announcement pushed the share price to as high as N27.5 per share on the qualification date.
Whereas in the case of Seplat Petroleum Development Company Ltd, the share price started declining after it declared dividend. The company on 23rd March 2020 declared a dividend of $0.05 per share. The dividend translates to N18.03 per share at the exchange rate of N360.5/$1.
The share price at the time of announcement was N544.5 per share. This gives a dividend yield of 3.31%.
Seplat share price fell to N494.4 per share on the day on qualification.
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These examples will show you that Dividend announcement is a very important thing that equity investor need to watch out for as well as the company’s financial reports.
Where to buy stocks
Stocks are bought from:
- Primary market through initial public offering (IPO) for shares that are being issued for the first time by a firm wishing to raise funds.
- Secondary market – here existing equities/shares are traded. Shares that were bought in the primary market are sold in the secondary market. Also, here investors benefit from shares that are either under-priced (time to buy) or overpriced (time to sell) shares.
Every equity investor need to be up to date with information about the economy and the companies he/she invested in. Because new information can lead to changes in the price of shares either positively or negatively.
He/she also need to be able to study, understand and analyze the financial statements of the firms which are released quarterly, to determine the financial status of the companies.
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The main Stock Exchange in Nigeria is the Nigerian Stock Exchange (NSE). All the companies that are listed on NSE release their financial results on NSE website – as well as all necessary information including dividend information.
How to invest in equity
- Decide which kind of investment you want to make (long term or short term)
- Open a stock brokerage account with a stockbroker (on NSE website – go to “dealing members” you will find the list of all the “active” stockbrokers in Nigeria)
- Fund your account and start trading
- Some stockbrokers have a platform where you can trade (buy/sell) by yourself while some don’t. In the later case you will need to send your buy/sell mandate to your stockbroker.
Read also; A Beginners Guide to Investing in the Nigerian Financial Market: Fixed Income Assets
Remember that we are in 21st century, with the internet making life easier. You no longer need certificates as a proof of having shares. You can now buy or sell shares on the Nigeria Stock Exchange from the comfort of your home using your mobile devices.
Written by
Ifunanya Ikueze
