BUILDING UP FINANCIAL FORTUNE FROM STOCK
INVESTMENT IN A DEVELOPING ECONOMY: A TREATISE ON NIGERIA.
BY:
ESHIOBO S. SHOLA, B.Sc, M.Sc (Econ) Benin,
ace
INTRODUCTION
Investment is paramount to the growth and development of the economy in particular the role of finance in investment can not be over emphasized and is very crucial to both real and financial sector’s development. Investment increases the productive capacity of an economy and also changes the goods market equilibrium. The creation of funds for investment involves the activities of the capital market. The capital market which deals with long term securities is divided into the stock and commodity markets.
The stock market is significant in long term savings mobilization and investment. The volume of economic activities and entrepreneurial dexterity create capacity for investment in the real and nominal sectors of the economy. This creates opportunities for stock investment and stock exchange business. Stock markets thus promote availability of liquidity and risk diversification services, motivate entrepreneurs who may later go public to raise capital.
Investors in stock require adequate appropriate, and large volume of information to make rational investment decision. Investors in stocks in developing countries often lack this information needed for rational decision making. Stock market growth, reflects, the growth of the real sector of the economy. A faster growth of the economy is said to result from greater stock market development although past financial depth is correlated with future depth. So developing countries that have well developed stock market in the past usually do well in the future. As investment contributes to economic growth so also it provides fortunes to the investors in stocks. Stock dealing involves speculations and risk management.
As the economy grows so also is the growth in stock investment to harness the resources of all the economic units and direct them to productive uses. This phenomenon enhances the wealth of both the nation and the individual capitalist investors.
A proper stock market information management and stock deal striking and investment at the appropriate time can lead to huge financial success. Developing countries, as emerging markets, have new opportunity lines to expand output of goods and services. This implies that stock or financial asset investment opportunities abound waiting for wealth creator to exploit.
In recent years there has been an enormous growth in developing countries’ stock markets.
The market flow in funds from abroad for local investment although it is often accompanied by increased volatility of the economy. This paper among other things examined the stability condition of an economy required for stock investment, information management, how to increase the value of stock over time, stock market development, international market links and ways of making your money work harder for you.
The Nigerian situation of the role of stock investment in bringing about increase in domestic income (GDP) production and tips for harnessing investment opportunities are also discussed.
2. THEORETICAL AND CONCEPTUAL
FRAMEWORK
The
theoretical foundation of this discussion is rooted in Harrod-Domar model and
the Duesenberry cash-flow theory.
Harrod-Domar model emphasized the key role of investment in economic growth process. To Roy Harrod (1960) and Evsey Domar (1946) investment creates income (demand effect) and increase in capital stock for expansion of productive base. The model explains a long-run steady state of capital-output and savings-investment flow equilibrium for economic growth. The model holds that national saving(S) mobilization and capital formation (I) in one period (t)is the source of output(Y) in the next period (t+1). i.e capacity of the economy for increased productivity in future.
It → Yt+1 > 0 ……………... (1a)
Y/
I > 0 = growth ……….
(1b)
Increase in
Savings-Output ratio(s) (propensity to save) S/Y or I/Y divided by a lower
capita-output ratio (k)
I/
Y magnifies economic
growth.
Recall that for a two sector model Y = C + I ……….. …(2a)
Y = C + S ………. …(2b)
Y - C = I ………….. (3a)
Y - C = S ………….. (3b)
Therefore S = I, savings-investment identity………(4a)
S/Y = I/Y = saving-output ratio(s)………………… (4b)
K (Kt — Kty) = Net investment
(I)……………. (5a)
Therefore
K/
Y = I/
Y = capital-output ratio
(k)….......(5b)
Note that a lowering of the capital-output ratio increases the effectiveness of the capital stock used in production.
Dividing equation 4b by 5b give the growth rate (g) of the economy.
G = s/k = I/Y ÷ I/
Y = I/Y ×
Y/I =
Y/Y….......................
(6)
G = s/k or
Y/Y
Note that the Horrod-domar model draw from the experience of Keynesian growth model. While the Keynesian model is a short run analysis, the Domar is a long run analysis. It should be noted that what is saved has to be invested for growth to be realized. Aggregate supply in an economy is stimulated by aggregate demand (demand creating supply) which has consumption as the major component.
The demand for investible funds from the capital market is a derived demand from the for goods and services in the economy. Net investment is supposed to be proportional to changes in output of the economy.
Duesenberry cash- flow theory explains that profits stimulate investment (Jhingan 2005) which in turn depends on income hence the tendency to compare income level and profit of one period to that of another. This means that the most important and interesting aspect of economic growth is the resultant profits made by the entrepreneurs. To sum up the profit theory of investment, the level of aggregates profits varies with the level of national income while the optimal capital stock varies with the level of aggregate profits. Returns on stock investment, no doubt stimulates and create wealth for stockholders. Stockholder’s expectation of returns is often high or optimistic as the economy growths. Developing economies are growing economies with potentials for investment and high returns.
Difficulty in mobilizing savings for investment among these countries makes interest rates and cost of funds to be high such that most of them are carrying heavy foreign debt stock that further under-develop them.
The development of indigenous capital market for domestic borrowing is imperative for economic growth.
This partly explains why ploughing back of undistributed business pays technique for internal funding of firms is on the increase.
Nigerian capital market has been schematized in operation and development to encourage the mobilization of savings through the sale of stocks.
2.2 MODEL SPECIFICATION.
Growth of GDP
of a nation is highly dependant on investment which in turn depends on the
financial investment in the capital market and aggregate bank credit to the
economy.
GDP = | (INV) ……………………………. (7).
INV = |(INPS, INSS, and GSC, PSC) …….. (8).
GDP = F (INPS, INSS, GSC, PSC)
GDP = a + b INPS + c INSS + d GSC + ePSC
GDP = Gross domestic product or national income of an economy.
INV = Investment at the current period.
INPS = Value of investment in primary stock or new equities.
INSS = value of investment in secondary or second tier stock market or old issues.
GSC = Total bank credit to the Public or Government sector
PSC = Total bank credit to the Private sector.
Because of the likely problems of multicollinearity and serial correlation among the variables, the model is re-specified as;
GDP = a0 + a1INPS + a2PSC
This transformed model will best capture the exact relationship between the variables to test the postulation that there is no significant relationship between GDP capital market and private sector credit.
3
NITTY- GRITTY OF STOCK INVESTMENT
3.1 Capital Market
A capital market is a network of financial institutions and facilities that interacts to mobilize and allocate long-term savings in an economy. (Nnanna, Englama & Odoko, 2004). This long-term funds are exchanged for financial assets issued by borrowers or traded by holders of outstanding eligible instruments. The capital market therefore provides essential investment services to a modern economy through capital formation, financial intermediation, financial advisory and development of managerial skills. The market also provides facilities for portfolio diversification which allows savers to reduce risk and maximize returns on their assets to encourage continuous savings for investment and economic development. The capital market is divided into the commodity and stock markets. In developing countries such as Nigeria, the commodity exchange markets are not yet developed to have meaningful impact on economic growth and development. Pits, where particulars products are traded, are not developed at all. The stock exchange market, where stocks are brought and sold, is more developed than the commodity market hence the focus of this discussion on the stock exchange. The products of the capital market traded in the stock exchange includes industrial equities (ordinary shares), industrial loans (debentures, unsecured zero coupons, government bonds/ stocks, specialized project loans e.t.c
3.2 The stock exchange
A stock exchange is an organized market place where members gather to trade in securities. It is a self-regulatory organization that supervises the operation of the formal stock capital market, provides mechanism for mobilizing private and public savings for productive purpose. It is the hub of any capital market providing regulations to protect the investors and dealing in both new and existing securities.
Stock market is commonly divided into two type’s primary and secondary market.
The primary stock involves fund sourced directly from investors through equity participation, industrial loans, mortgage loans and government bonds or stocks.
The returns or proceeds from these debt instruments go directly to the investors.
The secondary market is where existing securities or instruments purchased from the primary market are sold off by formers holders of the securities.
Stock ex change operation requires large volume of information, co-operation and internationalization to have assess to both domestic and foreign capital needed for economic growth on the basis of comparative advantage. Macro economic stability, political credibility, solid firm base, clear cut investment information are other vital factors needed for stock exchange development.
The developed countries parade highly developed exchanges such as New York, (USA), London (UK), Tokyo (Japan) e.t.c. While developing countries are struggling to develop theirs.
In Africa there is the Africa Stock Exchange Association (ASEA) established in 1993 in Nairobi to foster co-operation among members in stock exchange deals. Members include South Africa, Nigeria, Algeria, Angola, Benin, Botswana, Bukinafaso, Burundi, Cameroon, Cape Verde Island, Chad, Congo, Comoro Island, Central African Republic, Zambia, Mozambique, and Egypt as prime members. The association has held many seminars including Africa investment destination held in September 2006 in Stanton South Africa. More African regional stock exchanges such as Central, East, West and South Africa are moving to consolidate and over come poor liquidity to attract more foreign investment. African’s relative attractiveness as an emerging market has led an improvement in foreign investment. The largest and most developed of the African Stock Exchanges is Johannesburg in South Africa. Similarly 31 Europe and Asian countries formed the federation of Euro-Asian stock exchange (FEASE) in instabul (Turkey) in May 1995 with the slogan ‘gate way to market tomorrow’.
The Caribbean and Latin American countries formed the Latin American stock exchange (LATIBEX). Stock exchange operation differs among nations reflecting their individual economic needs.
3.3. The Nigerian stock exchange.
The Nigerian stock exchange (NSE) was established in 1960 as Lagos stock exchange and renamed the Nigerian stock exchange in 1977. The NSE, which open for operation in 1961 was incorporated as a private non-profit organization to provide (1) The Nigerian public the opportunity to purchase and sell stocks and shares. (2) Providing facilities for dealing in securities listed on it (3) Enhances flow of long term capital to productive investment (4) Oversea activities related to trade in securities by ensuring price fairness in quoted securities.
At present the stock exchange has nine branches and trading floors viz Lagos (1961), Kaduna(1978), Port Harcourt(1980), Kano(1989), Onitsha(1990), Ibadan(1990), Abuja(1999), Yola(2002) and Benin(2005). Lagos is the head office of the exchange and two new branches are proposed for Uyo and Bauchi. The NSE started with 19 securities (1961) listed for trading hitting 19.2 billion (2004) and 26.7 billion (2005) (CBN, 2005 annual report). The total market capitalization is over #4 trillion.
The NSE market has in place a network of well staffed stock brokerage firms, issuing houses(merchant banks), corporate law firms and firms of auditors and accountants who subscribed to the code of conduct ‘our word is our bond’. There are over three million individual investors and hundreds of institutional investors including foreigners/foreign companies who owned about 47% of the quoted companies. (October 6, 2006. http:// www.nigerianstockexchange.com)
Trading is carried out through automated trading system (ATS) involving a network of computers through which stock brokers match bids and offers on the different trading floors of the stock exchange.
To make the NSE more efficient and investor friendly, a central securities clearing system (CSCS) limited or clearing house was introduced in 1992 to electrically clear, settle and deliver transactions on the exchange. The CSCS has an integrated central depository for all share certificates electronic/ book-entry of transfer of shares from sellers to buyers, record of settlement of payment for purchased securities, a register of all members, custodian service for safe keeping of certificates of foreign investors, provides quarterly information on individual stock account, provide opportunity of using stock as collateral for borrowing money, reduce investor’s risk of loss of certificate, reduce operational cost of stock broking firms.
The NSE also has inter and intra-net services (NSE CAPNET) and a web site (www.nigerianstockexchange.com). The NSE has undergone internationalization in 1995 as a result of the deregulation of the capital market in 1993.
There are now local and international participants/investors in the market for instance Oando Plc was granted listing status on the Johannesburg stock exchange (JSE) in 2005.
Transaction in foreign portfolio was in excess of #10 billion less investments under banks recapitalization programme.
Trade alert service was launched in March 2005 to further secure the market against unethical practices, especially unauthorized sale of client’s shares.
The service keeps the investor informed or alerted about the statement of his stock account regularly or communicate market related information to subscribers.
3.4 Operators
of the NSE market
The operators or participants of the Nigerian stock exchange are dealers/brokers, jobbers, issuing houses, registrars, underwriters, trustees, portfolio or fund managers who provide services to investors and borrower’s in the capital market.
(a) Stockbrokers and dealers are licensed members of the stock exchange who maintain a fair and orderly succession of prices for a specific security traded on the stock exchange.
They act as agent to both buyers and sellers of stocks receiving to buy or sell order instruction from them. They provide professional advisory services on choice and management of investment. Their business is mainly in the second tier securities market (S S M) established 1985 to provide local indigenous investors opportunity to raise capital. They mobilize investor’s stock to be lodged with CSCS for transaction on the floor of each exchange and also Laise with stock transactions settlement banks using the ATM and transnet facilities.
There are over 220 stock brokerage firms with 193 very active ones in Nigeria, including foreign stock brokers that were incorporated in 1995. The firms are registered with the Securities and Exchange Commission (SEC) and CAC but licensed by NSE.
The minimum capital requirement for a brokerage firm to be licensed is #20 million as at 2002. Some of the operating stock brokerage firms that are limited include.
1. AAA stockbroker
2. Adamawa securities
3. Ail securities
4. All bond investment
5. Alliance capital management company
6. Altrade securities
7. Amyn investments
8. Anchoria investment and securities
9. Best worth assets and trust
10. BFCL assets and securities
11. BGL securities
12. BIC securities
13. BSD securities
14. Calyx securities
15. Capital assets
16. Capital Bancorp
17. Capital Express sec.
18. Capital trust brokers
19. Cash craft assets mgt
20. Cash Ville investment
The broker or brokerage firm receives commission or brokerage fee as its remuneration for services rendered to customers or clients.
(b) Jobbers: They are members of the stock exchange who specialized in particular group of securities such a mining, food, oil etc. They are the actual dealers in securities but transact business only with brokers who act on behalf of investors. Jobbers deal on homogenous securities while brokers deal on heterogenous securities.
Jobbers are very few and the number is even declining going by the increased activities of the brokers.
(c) Issuing Houses: A issuing house is a financial institution and a non-dealing member of the NSE.The house prepares prospectus for the sale of new securities to the public issued by companies and governments. They handle mainly primary securities covering offer for subscription, rights issues, (bonus shares to existing shareholders), offer for sale, private placement, financial advisers on mergers, acquisitions and takeovers. An issuing house requires #40million paid up capital to register.
(d) Registrars: These are transfer agents for the opening of registers and maintaining a list of shareholders of the companies on the conclusion of subscriptions and allotment. They are in two categories; in-house and the general registrars. The in-house registrar maintains its own register of members of listed companies. The general registrar is a distinct corporate body that specifically open a register for all members of the stock exchange. They also accept lodgement of documents in respect of concluded transactions, collation of returns on public offer such as interest, dividends or return money for over subscription.
(e) The Nigerian stock exchange (NSE): This is a self regulatory organization that supervises the operation of the formal capital market in addition to other investment guide/services.
(f) Underwriters: These are institutions just like insurance companies, that facilitate and induce success of securities on offer and at the same time hedge them against failure. E.g. a stand-by under writer of a security can make a promise to make money available in the event of under-subscription of the security. A firm-underwriter on the other hand can negotiate the price of subscription and pay the issuer off while adding his own margin to market the offer. There is a third group of underwriters that promised only best effort to market a security without financial commitment.
(g) Trustees: A trustee is firm that holds and manages assets like trust or pension funds, debt securities on behalf of individuals or institutional investors. These operators are assuming greater role with the introduction of the new pension scheme by the federal government of Nigeria in 2005.
3.5. Operation of the Nigerian stock exchange
The Nigerian stock exchange opens for trading in bids and offers between 11am and 1.30pm on the average on every business day. It use the automated trading system (ATS) to facilitate business between sellers and buyers of securities via their agents-broker, jobbers, dealers, issuing houses and other operators of the market.
The price of new issues for subscription is determined by the issuing house\stockbrokers while the secondary market prices are determined by the stockbrokers only. A round of transaction (T) is processed and concluded within four (4) days i.e. (T+3 days) in electronic book entry form. The transaction update is sent to the relevant registrars by the CSCS Ltd to constantly update the register of members of listed companies. Over 400,000 shareholders are on the CSCS system register and only 2,200 request for certificate to date.
The stock position of an investor is obtainable from the CSCS 4 days after transaction (T+4 days). Investors statement of stock position are issued every quarter free of charge and when on request paid a token charge of #100. Armed with this information investors can speculate more and take advantage of capital appreciation/depreciation in their investment to make useful capital investment decision.
The All-share index (real index) of the exchange was formulated in January 3\1984 as the base year (1984=100). When an investor subscribed to equities and he his allotted after full payment he his entitled to attend the annual general meeting (AGM) of shareholders and can vote to elect the management of the company. The returns on equities to the investor is by way of dividend or price appreciation or scrip issues. The returns on government stock or bond or debenture and other industrial loans is the interest rate yield.
3.6. Stock deal rules
and regulations
The
regulations for NSE is derived from the Securities and Exchange Commission
(SEC), the stock exchange itself, the central bank of Nigeria and the federal
ministry of finance. These are the regulators of the market.
(a) Securities and Exchange Commission Regulations
SEC, the apex regulatory body of Nigerian capital market, is empowered by SEC decree of 1999 to among others.
(i) Register and approve all securities for subscription or sale to the public while ensuring full disclosure of information in the prospectuses and other documentation for public offer.
(ii) Ensure fair, orderly and equitable dealing in securities.
(iii) Register commodity and stock exchange, investment advisers and all market operators with a view to maintaining an enviable standard of conduct and professionalism in the stock market.
(iv) Review, approve and regulate mergers and acquisitions
(v) Perform market oversight function through surveillance, monitoring inspection etc.
(vi) Promote investor’s education in the securities market (Nnanna, Englama & odoko 2004 P.79)
(b) The Nigerian Stock Exchange Regulations
The NSE has stock market legislation derived from
(i) The Lagos stock exchange act of 1961
(ii) Companies and allied matters Decree of 1990
(iii) Nigerian investment promotion commission Decree of 1995
(iv) Foreign exchange (misc provisions) decree of 1995
(v) Investments and securities Decree No 45 of 1999.
The NSE accept a zero tolerant level of fraud hence it has put in place rules and regulations guiding the behaviour of the various operators in the market. Sanctions ranged from payment of penalty fee, withdrawal of lincense to payment for any damage caused.
There are rules guiding fund seekers in both primary and secondary market as well as rules for investors and their agents.
The listing requirements for new issues or first-tier securities are:
i. The company must be registered as a public limited liability company under the provisions of CAMA 1990 and as amended.
ii. At least 25% of the nominal value of the share capital must be offer to the public.
iii. The date of the last audited account must not be more than nine (9) months at the time of offer.
iv. The company must submit to the stock exchange its financial statement and business records for the past five years.
v. At the time of listing, the number of shareholders in the company must not be less than 300.
vi. The securities must be fully paid at the time of allocation.
vii. The annual quoted fee payable by the companies in this market is based on a Percentage of its total market capitalization.
viii. After listing, the company must submit quarterly, half-yearly and annual accounts to the exchange.
The listing requirements for the second-tier securities are:
(I). At least 10% of the nominal share capital must be offer to the public.
(ii). At the point of listing the number of shareholders must not be less than 100
(iii) The amount that can be raised may not exceed #100million
(iv) Financial statements and business records of the company for the past three years must be submitted to the stock exchange.
(v) The quotation fee for companies in this market is a flat rate of #30,000per annum
(vi) A single individual cannot be allowed to hold more than 75% of the total shares directly or indirectly.
(c) The Central Bank of Nigerian (CBN) regulations
The CBN is the apex regulatory authority for both banking and non bank financial institutions. It lays down the terms and conditions for the issuance of federal government stocks and stabilize the market by purchasing all government stocks on issues that are not taken up by other purchasers (underwrite), she subsequently sell them back to the market as the need arose for government stock.
(d) Federal Ministry of Finance (FMF) regulation
This ministry advises the federal government on the over all fiscal operations in the economy and collaborates with the CBN on monetary matters. It formulates fiscal policies to influence and regulates both the capital and money market sector of the economy.
4. RISK
MANAGEMENT AND TIPS ON STOCK INVESTMENT.
The investors in stocks or securities, like every other economic decision maker, often take decision under conditions of uncertainty.
The result or possible outcome of certain decision made by an investor can not be exactly predicted. This not withstanding entrepreneurs and investors have to make decision and bear what ever outcome (profit or loss) that result (risk taking). Risk management is therefore imperative for understanding the rationale for decisions under certainty conditions to provide a useful framework for forecasting the some what more complex analysis required for decision making under uncertainty. This frame work can help to optimize decision by minimizing risk incidence (Pappas & Hirschey 1990).
Risk itself refers to the deliberate exposure to harm, hazard or peril in business by a person where the possibility of some unfavorable outcome is high. Basically there is the assumption that people avert risk in business management. The truth is that there are some who take risk and others who remain neutral. A risk averter would settle for low risk investment while risk seeker will pick high risk investment with the expectations of maximum profit from high risk instrument.
The risk neutralist base his decision on what is on ground at the lowest possible returns. Measuring risk is a complex task with a great deal of controversy surrounding it.
However, probability distributions have been employed to attempt the measurement. The tighter the probability distribution of possible outcomes, the smaller the risk of a giving decisions. This means that actual outcome of a decision will be close to the expected value and verse versa if less tight.
Standard deviation and coefficient of variation are frequently used to measure risk in economic analysis.
Managing risk in stock investment requires probability forecasting and the use of valuation model adjusted to certainty factor (Pappas & Hirschey, 1990).
Certainty
equivalent or adjustment factor (V) = Equivalent certain
sum
Expected risky sum
a < 1 = Risk aversion
a = 1 = Risk indifference or neutrality
a > 1 = Risk preference or seeking
Valuation model adjusted to certainly factor
V
= ∑ aE(Bt)
t=1 (1+i)t
Where E(Bt) = expected future profit i = risk free discount rate
a = certainty factor that captures probality outcome under the state of the economy when there’s recession, normal or boom and the state of nature (war or peace time)
t = the period under forecast (yrs)
4.1. Risks associated with stock investment:
(i) Loss of capital: This is the biggest risk faced by an investor where part or all the investment get lost.
(ii) Business risk: The Company whose stock you invest in may not be able to generate sale or may not be able to grow and compete with other competitors in its industry. When this occur the price of the stock will start falling or depreciating and the business may even fail leaving the stock completely worthless.
(iii) Non Diversification: Non-diversification of stock portfolio is like “putting all your eggs in one basket” leading to unsystematic risk. If you hold one type of stock and the value falls by say 40%, then you have lost 40% of your investment.
(iv) Liquidity risk: When you are ready to sell your security, there may be too few investors willing to purchase the security. This could result in high transaction fees which would lower your expected return or increase your expected loss.
(v) Interest rate risk: This risk affect all fixed income securities like bonds, preferred stocks, CDs etc. If interest rate rises after purchase of the security then the value of your security would be lowered and price would fall.
(vi) Systematic risk: This is a market risk associated with the movements in the stock value in the overall market. If the overall market value declines, the value of your portfolio would also decline.
(vii) Purchasing power risk: The rate of inflation affect the purchasing power of money hence an increase in inflation reduces the value of your stock.
(viii) Taxation risk: Changes in the tax laws for dividend income and capital gains could change the demand for investment in stocks.
4.2. TIPS ON STOCK INVESTMENT
“Why should you work harder when you can make your money work harder and smarter for you?” (Gulf hurricane, Oct. 6, 2006)
The above quotation summarizes what you can do with your money to create abundant wealth and financial fortunes. You need information, skills and knowledge of how money works and how to make money Applying the following tips will make your money work hard (efficient) and smarter (higher returns) for you.
In Nigeria you can invest in the following areas of the capital market-industrial equities (ordinary shares) securities, industrial loans such as debentures, unsecured zero coupons, preference bonds/stocks, federal, state and local government bonds/stocks, specialized project loans/infrastructural loans, unit trust schemes, unlisted corporate/industrial loan stock /bond, Acceptances etc. To go about investing in the above instruments the following guide may be useful.
(i) Set your goals:
Have a clear cut objective of what you want to do with your money. Having a clear and defined goals is essential to successful investment. Clarify your stand by answering these questions:
- Are you investing in the short or long term?
- How much money do have to invest now
-How much money will you need in future to take care of education at the college, a home/house, a car, retirement, vacation etc.
- How much money will you be able to invest without changing your life style?
-How much returns do you reasonably want from your investment?
-How risk-tolerant are you since risk tolerance indicates your willingness or unwillingness to invest. Discipline and research is required to develop your long-term investment plan which will help you avoid the risks associated with the desire of a quick profit.
(ii) Search for information and research into the stock market¸
Information is very vital to understanding investments in the stock market. You need to understand the totality of market operation and information. For this reason, it is often advisable to contact a professional stock broker for advice. The more information you get about the market the better. Look at company information (annual reports, prospectus etc), newspapers, magazines, television, CBN/NSE reports, internet, radio, visits, information from workers of the company etc
Take time to learn about the companies you may be interested in investing in. Understand what industry they are in, their past performance, future prospects/growth potentials, is their growth steady, cyclical or static? How is the market share commanded in the industry?
What is the volume of sales and how do they make their money. Technical analysts use the moving averages technique to smooth out data from day to day fluctuations to make them easier to track the trends of financial assets in a stock analysis.
(iii) Assess the company’s value
Carefully evaluate the asset worth of the company you are interested in investing. You can use discounting and stock adjustment models (discussed earlier on) to properly asses the value or worth of the company. Look at the book value to examine the gross earnings, profit rate, capitalization and debt stock. According Hisrich and Peters (2002) the present value of a firm or company
(v) = R (1+r)n ap
(1+d)n
R = current revenue level
r = expected annual rate of growth of revenue
n = holding period (years) between now and expected liquidation date.
a = expected after tax profit tax over the holding or liquidity period.
p = expected price earning ratio of stock over the holding period.
d = appropriate discount rate for venture capital investment at this stage of risk and liquidity
(iv) Consult a professional dealer/stockbroker
There is need for you to contact a professional stockbroker who is a financial consultant for information and guidance. However, you have to do this with your eyes wide open so as not to pick the one that will feed you with information from the chat-room which are rarely reliable. Ensure the broker deals on the type of stock you wanted and don’t, allow him to be a business maker. A beginner investor should make use of a discount broker because of the affordable fee charged while high volume capital investors can employ the full service broker who charges high annual services charge to your account but very efficient.
(v) Buy and hold stock
Remember that it is what we sow that we reap according to the scriptures. Therefore you should buy and hold appreciable number of stocks in your portfolio for a long period of time. Historically, stock market move upward increasing in value overtime. The buy and hold strategy will enable you reap huge profit in the long run from the long run increase in value.
Look for the stock of firms that are industry leaders, companies with high financial strength with increasing market share or companies that have potential for long term growth. Buy stocks that are 52weeks high i.e. maintaining higher price throughout the year.
The value of your investment in this type of stock has exponential increase enabling you to amass huge wealth overtime. You buy more stocks when their prices fall and less when their prices rise.
(vi) Diversify Your Portfolio: Do not put all your eggs in one basket. Cast your bread on many waters. It is better to have different type stock investment in your portfolio to reduce your risk premium in investment. It is good to have 15 to 20 different stocks spread in 5 to 10 different industries. Select your stock or bond based on the amount of risk you are willing to take. In Nigeria the line of investment in the capital market include industrial equities of emerging firms and second tier securities of quoted companies in the following sectors
1. Agriculture
2. Airlines
3. Automobiles & tyres
4. Banking
5. Breweries
6. Building materials
7. Chemical & paints
8. Commercial/services
9. Computer & offices Equipment.
10. Conglomerates
11. Construction
12. Engineering Technology
13. Food\Beverages & Tobaco
14. Footwear
15. Health care
16. Hotel and Tourism
17. Industrial\Domestic products
18. Insurance
19. Machinery (Marketing)
20. Managed Funds
21. Maritime
22. Mortgage Companies
23. Packaging
24. Petroleum (Marketing)
25. Printing & Publishing
26. Real Estate
27. Textiles
28. The foreign Listings
Note that multiple income stream guarantees financial freedom and risk reduction.
(vii) Set Aside Special
Investment Fund¸
You need to commit some amount of money to investment either quarterly, yearly etc. Do not be swallowed up in financial indiscipline depicted by the slogan ‘what I earn is too small for me to be able to save and invest’. To be wealthy and flourish financially you must have multiple income streams and you must choose to invest in stock or in a part time business. Check the profile of investment of the following Bill Gates, Dangote, Jim Ovia, Mike Adenuga, Bishop Oyedepo etc with multiple income sources. Map out a long term strategy of making particular investment in stocks e.g. every year I will commit #100,000 to the purchase of stock in a particular blue chip stock (shares of large, well established, financially-sound companies with steady revenue and dividend payments).
Do not be a consumer of all the income that comes your way. Always keep a part for investment and in no distant time your fortune will swell. A man’s wealth is not is not in the coins he carries in his purse but the income he buildeth which continually floweth into his purse whether he work or travel (Osaren Emokpea 2006).
(viii) Stocks screens: A set of criteria or checklist can be used to access the stocks that you may want to invest. For you to narrow down easily on your stock choice used few important criteria from the array before you. The stock market report of dailies especially business day has some of these important criteria.
Some of the criteria are: -
1. How much money are you expecting as returns at the end of the investment period. Will your choice stock enable you achieve your goal?
2. What is the price of the stock? Is it to high, low or moderate. Low price stock with bright future are good but be very careful not to invest in junk stocks that are cheap but with poor or no returns at all. Commonly moderate price stock reduce the risk of investment in junk stocks.
3. Do you want your dividends cash or plough back and left to grow in stocks from capital appreciation or scrip issues.
4. How risky is the stock: - Do you invest in blue chip stock (high market value stock) or small cap or red chip (low market value). Blue chips are less risky because the probability of bankruptcy of the issuing company is close to zero. The price paid for a stock should be less than or equal to the rate of returns of government bond/stock (GR) plus a risk premium (RP) of between 4% and 5%. PS £ GR + RP of given that Federal Government bond rate is 10% then price of a stock to be purchased should not be greater than 14% (10+4) or 15% (10+5) of the government bond value.
5. What is the price-earning ratio of the stock like? Is it small such that the price-earning ratio is minimum or maximum (larger) as years go by?
Price-earning ratio (P/E) = market price of share offer
Dividend rate per share offer
The P/E ratio of different stock are compared each other overtime to see the best performer of dividend pay-out and pay off. It is best to use the current market price of the stock as the numerator and to measure it.
6. Do you want a stock that is 52-week high (high price over 52 consecutive weeks of trade) or 52-week low?
7. Is there a possibility of familiarizing with the company to known the worth. Is there any particular stock exchange that you want the company to be listed (local or foreign or both). Avoid buying unknown or relatively new stocks or unpopular company stocks.
8. Buy company stocks when the price is low and sell when the prices rise to an unprecedented level. Review you stocks holding every six months to determine whether to continue to hold or to sell.
5.
STOCK INVESTMENT AND NIGERIA’S ECONOMIC GROWTH
Long term investment in financial assets is known to contribute immensely to capital accumulation. However, the growth in the number of listed equities in NSE has not been impressive.
Table 1 performance of equities listed in
the Nigerian stock exchange (Nmillion)
Year No. Listed Trading Trading Value of new Value of old Market
Value
Nm
Value Nm
equities Nm equities
Capitalization Nm
1990 131 52.6 87.8 1154.5 238 12134
1991 142 47.2 90 1099 234.4 18,447
1992 153 105.7 237.1 1724 491 26.246
1993 174 186.7 286.6 3983 804 41831
1994 177 190.8 401.3 2.673 229 175065
1995 181 346.1 1788.1 7084 460 279,783
1996 183 733.5 6923 21453 6961 279783
1997 182 1160 10923 91110 11031 276305
1998 186 2081 13555 17279 32409 256774
1999 195 3914 14027 44160 32440 294465
2000 195 4998 28155 35711 28153 466058
2001 194 5891 57613 44160 57684 648449
2002 195 6616 59311 67322 59407 748735
2003 200 13242 113887 185000 120403 132567
Sources: (a) CBN Statistical Bulletin
vol. 1999 Pgs. 58 – 6,
117
(b)Nnanna, Englema, Odoko (2004) Financial
Market In Nigeria Pg. 155
(c) Nnanna, Englema, Odoko (2004) Financial
Investment and growth Pgs.34,67
(d) CBN annual Report and Statement of
Account December 2005, Pg. 53
ANALYSIS
From
the above table, the number of listed stocks increased gradually by an average
of 2 stocks per annum. The trading value increased progressively over the period
from N87.8million in 1990 to 1788 million in 1995 and 28154.6 million in
2000 to 113886.6 million in 2003. Market capitalization follow the same fend
event the drop in 1998. The value of new equities are more than the old ones in
all the years except 2001 when old issue was greater by #13.5 billon.
The growth in new issues i.e. primary stock, increased exponentially from #44.2 billon in 2001 to #552.8 billon in 2005 bank credit to the private sector and Gross domestic product, from 1991 are set below
Table 2 ¸Gross Domestic Product, primary stock and private sector credit in #Billion
Year Nominal NGDP Primary Private Sector
Stock (INPS) Credit PRSC
1991 324.0 1.1 45.3
1992 549.9 1.7 56.8
1993 697.1 4.0 68.1
1994 914.9 2.7 117.8
1995 1977.7 7.1 175.8
1996 2823.9 21.5 223.2
1997 2835.0 9.1 276.5
1998 2765.7 17.3 352.4
1999 3193.7 44.2 455.2
2000 4842.2 35.7 596.0
2001 5488.0 44.2 855.0
2002 6232.2 67.3 955.8
2003 7191.1 185.0 1212.0
2004 8553.3 235.5 1534.4
2005 11357.3 552.8 2007.4
Source: As in table I
The GDP growth has been steady except the negative growth experienced in 1998. Growth in primary stock or new issues is about 230% annual increase between 2001 and 2005. It however fluctuated between 1994 and 2000. Private sector credit shows a gradual increase over the period. The regression results to test the significance of these variables in influencing GDP are
NGDP = 1188.40 + 0.573 INPS + 4.918 PRSC
S.E (630.6) (2.99) (1.045)
T.R 1.885 0.192 4.70
R2 = 0.9842 R-2 = 0.97629
F- Statistic F (4,8) 124.55, S.E of regression 484.35.
RSS =1876782, D.W = 2.0878
From the results of the parametric tests, private sector credit is statistically significant as the standard error is less than half of the estimated coefficient. Primary stock is not statistically significant as it is not significantly different from zero. Therefore a positive linear relationship (0.573) exist between NGDP and new stock issued or primary stock as well as private sector credit. A unit change in primary stock changes NGDP by 0.573 while a unit change in PRSC will change NGDP by 4.918 units.
There is a good fit of the variables going by R2 of 98.4% and R-2 of 97.6%. showing the stability of the model. There is no first order serial correlation as shown by the D.W. test of 2.08 which is close to 2 (absence of serial correlation).
The above result were obtained by using the Cochrane-Orcutt AR(2) which converged after 7 iterations to improve on earlier result of the regression model.
The implication of the above empirical results is that new issues is not significantly contributing to NGDP but private sector credit is significantly contributing to NGDP growth.
This perhaps explains why Nnanna et al (2004 in Financial markets) declares that “empirical evidence shows that the role of the capital market is limited in Nigeria because of its low contribution to capital mobilization for investment”. They further claimed that “the growth in listed equities in NSE has not been impressive given the number of incorporated companies by the CAC”. This low performance is an indication of the fact that there is under-investment in new equities to mobilize fund for Nigeria’s economic growth. There is therefore the need to invest in new equities to make money and contribute to Nigeria’s economic growth and development.
6.
CONCLUDING
REMARKS
Stock investment requires abundant information to deal with speculations and risks involved in stock exchange transactions. Stock exchange markets are still underdeveloped in developing countries where most are forming association to over come the problem.
As new emerging markets, developing countries have a bright chance of stock exchange growth as years go by. Economic growth theorists have accepted the important role of savings-investment and cash flow from profits as paramount to economic growth and development of any nation. Nigerian capital market is underdeveloped but with an exponential increase in the investment on new equities in 2005 courtesy of commercial banks recapitalization programme. The internationalization of the Nigerian stock exchange, the introduction of CSCS and trade alert services added plus to its operational efficiency. The volume of transactions of any stock exchange lies in its links with other stock exchanges. Empirical results show a negligible contribution of primary stocks to NGDP growth.
In the light of the above findings and nitty-gritty of stock exchange operation, the following recommendations are made for possible consideration.
a. Underdeveloped countries should strive to create investment friendly environment through effective and stable macro economic policies. Political stability, good governance, basic business infrastructural support, easy business registration, non multiple and fair tax etc. to encourage investors.
b. More trading floors of the NSE should be opened to bring the opportunity of investing in stocks closer to prospective investors.
c. The inspection unit of the SEC, NSE and CAC should be revigorated to x-ray the details of every company’s operation and make the information public to guide stock investors.
d. A monthly periodical on stock investment market information should be published by the NSE and circulated through a national daily, preferable business day, on every first Friday of a new month.
e. People (Nigerians) should form the habit of investing at least 20% of their annual income on stocks every year.
f. Stock investors should diversify their investment portfolio in stock to minimize risks/losses and should strive to consult a professional stock broker for advice especially in their first investment attempt.
REFERENCES
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CBN (1999) : Statistical Bulletin. Vol.10, No. 2. Abuja
CBN (2004) : Annual Report and Statement of Accounts . December, 2004.
CBN (2005) :Annual Report and Statement of Accounts. December, 2005.
Ebajemito J.O, Bamidele A,(2004); Financing Investment for Growth;
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