Beginners Guide to Stock Investment

In a previous 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 shareholder 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 N20 (cost = 20 × 1000 = N20,000) and you sold it at N25 (sales = 25 × 1000 = N25,000).

Therefore, capital gain = N5,000. 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 N2 per share, then you will get a total dividend of 1000 ×N 2 = N2,000 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 N1,800 as your dividend.

Some companies give share bonus to the shareholders. This year several companies have announced share bonus including Africa Prudential Plc, VFD Group Plc, Regency Assurance Plc, Industrial & Medical Gases Nigeria Plc, among others.

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.

Hence, it is important to do your due diligence when investing in equity, to know more about the company you intend to invest in.

Although firms pay dividends to shareholders from their profit or retained earnings, 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.

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.

The main Stock Exchange in Nigeria is the Nigerian Exchange (NGX). All the companies that are listed on NGX release their financial results on NGX website – as well as all necessary information including dividend information.

How to invest in equity

Open a stock brokerage account with a stockbroker (on NGX website – go to “find a broker” you will find the list of all the “active” stockbrokers in Nigeria). Some required documents include a valid ID, proof of address, passport photo and any other document requested by the broker.
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.

Remember that we are in the 21^st 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