INVESTMENT GROWTH AND DEVELOPMENT THROUGH THE STOCK MARKET
BY
Austin O. Okolie
[B Sc; MBA (Benin); ACA; M Sc. (Finance & Banking-Nigeria)]
Introduction
Components
of the Capital Market
The
Stock Market Components
Operation
Concept
of Investment
The
market for investment in stock
Long
term investments
IPO
/ Private placements
Investors raise long-term funds from capital markets. The Capital Market is the other segment of the financial system. Like the money market, it comprises of financial intermediary institutions that facilitate capital formation, mobilization and channeling of capital funds to various end users on long-term basis. The capital market is designed to finance long-term investments through the pooling of resources (funds) from divergent savings surpluses units and institutions. The capital market is the most credible source of cheap long-term funds in any economy. By its function, the capital market plays a very vital role in stimulating industrialization, provision of infrastructures and hence economic growth and development in any economy.
Investors should, therefore know the ways in which securities are traded and priced in the Stock markets. They should also know the procedure to be followed in issuing securities. The role of Nigeria stock market is so wide that it deserves a greater attention because of the importance of investment development in the country. As capital markets deal in long-term loans, the aim is to mobilize fund for those investors who are ready to invest in capital projects. The stock market as a segment of the capital market constitutes a major instrument for promoting investments and the well being of citizens. The remaining part of this paper discusses the influence of stock market on investment growth in Nigeria.
COMPONENTS OF THE CAPITAL MARKET
The capital market constituencies can be broadly categorized into four namely: provider of funds, users of funds, market Intermediaries, and market Regulators.
Provider of Funds: As the name implies, these includes individuals, pension funds managers, insurance Companies, unit trust schemes, who have funds to invest in companies while expecting good returns on their investments.
Users of funds: Institutions that access the exchange to raise funds either for expansionary or developmental purposes. They include Government at Local, state or Federal levels, public limited Companies are also included in this group.
Market Intermediaries: These comprise of all parties that facilitate the transfer of funds from the surplus sector of the economy to the deficit sector, i.e. the end users.
They mediate between the providers of funds and the users of same. They include stockbrokers, issuing Houses, insurance Companies, Unit Trust Schemes and other funds managers.
Market Regulators: The regulators formulate policies, rules, regulations and guidelines for all the market operators to comply with. Any erring operators is sanctioned and disciplined. The Securities and Exchange Commission (SEC) is a government Regulatory Agency that is the Apex Regulatory Authority in the capital market, while the Nigerian Stock Exchange is a self-regulatory body that regulates the secondary market which includes licensing of the stockbrokers and also providing the facilities for trading on securities in the secondary market.
The Nigerian Stock Market can be said to be composed of the Nigerian stock exchange. In the Nigerian case, the stock exchange defines a network of institutions, which in various ways bring together suppliers, and users of capital funds. Stock exchange is the hub of the capital market and it is a market-mechanism in which members of the market (i.e. stockbrokers buy and sell stock and shares, and invest in companies or in governments and government agencies. A stock exchange is also called a stock market.
Stock and shares fall into two basic categories: shares or equities, which give the buyer part-ownership of the company in which he or she has invested; and Stocks or Bonds by means of which money is lent to a government or its agency or a large company without giving the subscriber or purchaser a right of ownership. Both stocks and shares are covered by the generic term - Securities. Traders who deal in securities in a stock market are variously designated as brokers, agents and dealers. They buy and sell from and for companies, governments, organizations, and individuals.
The stock market instruments have original maturities of more than one year. Regardless of the nature of the paper in which trading is undertaken, it is necessary to distinguish between transactions in the primary market and those in the secondary market. The primary market provides for the issuance of new securities, while the secondary market facilitates the trading of existing securities. Primary market transactions secure funds for the initial issue of securities. Secondary market transactions do not. Some stocks have a more active secondary market and are therefore more marketable than the others. This is an important fact for financial market participants to note if they plan to sell their holdings prior to maturity.
The stock exchange is a capital market in where investors can raise funds by issuing share or loan stock. It is more important as a secondary market for buying and selling existing securities. If this secondary market did not exist, investor would be less willing to subscribe for new issue of securities in the primary market. This is because investor will usually want to be able to sell some or all of their shares and so realize their investment if ever and whenever they want to do so.
The price of investment securities on the capital market, as in other free market are determined by supply and demand. When more people want to buy than want to sell particular investment, the prices of those shares will rise. When more people want to sell them than want to by, the price will fall. The market responds more quickly to what is happening. When the price of investment is going down, because many investments have been sold suddenly, other investors may become concerned that the value of their investment is dropping. The remaining investors may try to sell their investment quickly before the price drops further. This will cause a glut and therefore put future pressure on prices. Sometimes movement in price of investment are reflected by management development programmes, government policies etc.
The market operates under two segments: the primary market and the secondary market. The primary market is where Initial Public Offers (IPOS) and other new issues such as public Subscription, Right issues, etc. are raised. The secondary market is the market where existing shares are bought and sold among investors of quoted companies on the Exchange.
In the primary market, funds users issue various Equity or Debt instruments and make these available to the investing public through their receiving agents. These instruments now serve as avenue (window) of investment to the public. All an investor should do here is to visit any of the receiving agents (Banks, stock broking firm) and collect the subscription form. He fills this form and returns it with the equivalent amount of money for the units he has subscripted to. He receives in return a bank deposit slip, if he has used the bank, or, a receipt of deposit, if he has used stock broking firm. When the issue is concluded, a certificate of share holding will be posted to the investors vide the address indicated on his subscription form.
Whereas in the secondary market, the only agents recognized and authorized to transact business on behalf of investors are the stockbrokers. He must be an employee of a Dealing Member, the stock broking firm. Where, the investor approaches the stockbroker with the amount of money he wishes to invest either on a specific stock or seek the brokers financial guidance on viable stocks to invest in, the stockbroker will issue a receipt acknowledging the cash/ cheque deposit. He takes his order to the market and purchases or buys for him.
After carrying out his order, he issues the investor with his company purchase Contract Note, if he has bought for him, or sales contract Note, if he has sold for him. The trading cycle of transaction is T+3, Which is transaction Day plus three working days thereafter. This translates to means that if you buy in the secondary market you become a beneficial owner on the forth day. A CSCS statement of stock could be obtained to evidence your stock holding.
Investment is the use of money to earn income or profit. Many people invest part of their income for future financial gain. Others make investments to protect the purchasing power of their savings against rising prices. There are basically three motives for investing and these include transaction, speculation and precaution. Investment promotes economic growth and contributes to a nation’s wealth. When people deposit money in a savings account in a bank for example, the bank may invest by lending the fund to various individuals and companies. These individuals and firms in turn may invest the money in new factories and equipment to increase their investment.
In addition to borrowing from banks, the stocks and bond are issued in stock market that they could sell to investor to raise capital needed for investment. Government also issue bonds to obtain funds to invest in capital projects. All such investments by individuals, investors and governments involve a present sacrifice of income to get an expected future benefit. As a result, investments raise a nation’s standard of living.
KINDS OF INVESTMENT
Before making any kind of investment, a person should learn as much as possible about how the money will be used. The person should also find out what he or she can gain from an investment. Every investment involve some risk-that is a chance of loss. An individual should carefully examine the expected income from an investment in relation to the degree of risk involved. A person should also know if he or she can easily turn an investment into cash that may be needed to take care of unexpected expenses.
Some of the risks can be avoided by ensuring broad diversifications. Risk averse firms and individuals are advised to invest only in gilt securities since they are risk-free. To know which investment is suitable for you, it is better to consult the experts, the stockbrokers. What is suitable for ‘B’ may not be suitable for ‘A’ since their situations in life may differ and they may also have different investment objective.
The beauty of it all is that the stock market provides investment outlets for the savings of thousands of individuals to be invested.
THE MARKET FOR INVESTMENTS IN STOCKS
The stock market is the market from which investors attract long-term investment funds through capital market and stockbrokers who are licensed to perform stock market functions. The stock market performs the function of finance investment whereby the savings of some members of the society are harnessed and made available to other members of the society for investment. The allocation of such savings must be done efficiently.
Stock market is a market arrangement in which members buy and sell stocks and shares, and make investments in companies or in government and government agencies. Share (or equities) give the buyers the right of ownership or part-ownership of the company in which he or she has invested; while stocks (or bonds) is a means by which money is lent to a government or its agency or a large investment in a company without giving the subscriber or purchaser a right of ownership. Both stocks and shares are covered by the generic term, securities. The stock markets, as the marketplace where investment stocks are traded, play an important role in channeling savings and investments into companies and governments.
STOCK MARKET AS INSTRUMENT OF PROMOTING INVESTMENT
The stock market is important for the mobilization of long-term funds for corporate investment growth. The level of investment growth is determined by effective operations of the stock market. According to Remeth and Ronald (1977) ‘there is no doubt that the function performed by the capital market determines, to a large extent the amount of capital supplied for investment”. They argued further that capital markets channel savings into investment returns at a given level of risk. If there were no risk, fund would be allocated when the interest rate is uniform in all uses. It also creates a continuous market for immediate sales or purchase of investment at prices determined by their value where supply and demand forces enable investors who have such marketable securities to maintain continuous liquidity, as they are not obliged to holding them indefinitely.
STOCK MARKETS AS SOURCE OF FUND FOR INVESTMENT
The main source of fund for long-term investment is capital market. The ways a company can raise funds are many. A company can raise funds in the primary market in which investors can buy into or become a part owner (shareholders) of the company. These methods include:
(a) Offer for Subscription: A company any decide to offer its shares to the general public to buy, processed that accrue from this transaction are used by the company for the purpose that was stated in its prospectus. This is for a company that is already listed on the Exchange.
(b) Offer by Introduction: A company that has met with its paid up capital may get listed on the stock exchange by introduction without having to go through the process of raising fund.
(c) Initial Public Offer: It implies the first time such company (the issuing company) is coming to the market to raise fund.
(d) Right Issue: This is an offer made to existing shareholders only. It is usually made at a price lower than the current market price.
(e) Private Placement: This is an arrangement where securities of a company are sold to selected prospective investor by the issuing house / stockbrokers handing the issue in a private manner, instead of the securities being offered to the general public.
(f) Script issue / Bonus Share: A company may offer its existing shareholders new shares as against cash dividends. The new shares will be paid out from either Share premium account or other reserve accounts in the company’s books.
(g) Offer For Sale: This is where an existing ownership will offer to the public its holding in a company (e.g. Government Privatization Scheme)
(h) Conversion: This involves changing owners from one form to another, e.g. converting loan stocks (debentures, preference stocks to equity shares). The process is often referred to as security swap).
INVESTMENTS AS A MEANS OF PROMOTING OPERATIONS OF STOCK MARKET
The stock market is important to investors as far as the mobilization of long-term funds for investment growth. The services of stock markets are rendered to investors and investment is the means through which operations of stock market is promoted. The services of the stock market fall into three parts namely: advisory, investment and planning.
(i) Advising - The investors advise what is the most suitable method of issue what type of investment to issue, what the issue price should be and when is the best time to make the issue
(ii) Investment - The reputation and integrity of all persons concerned with the issues the correct compliance with all legal and accounting requirements and the validity of the claim made in the prospectus. Companies desiring quotation will want the issue to be sponsored by an issuing House whose high standing will inspire the confidence of the investors. Investors’ confidence is based on the care, which the issuing house ensures by providing full and reliable information to the investing public.
(iii) Planning and co-ordination: The planning, co-coordinating and implementing procedures required to effect the issue including the appointment and supervision of solicitors, broker and reporting accountant, and where these are different from those normally employed by the company, to liaise with the stock market, arranging the form of the prospectus, under-writing and possibly handling application and allotments. The issuing house do act as sponsors on behalf of the investors when offer for sales are made to the public and sometimes serve as underwriters of issues when they buy share for resale to public. They earn their agency fees when they act for the investors and when they under writer issues of shares
LONG TERM FINANCIAL INVESTMENTS
According to Kenneth of Ronald (19740, long-term financing of investment is a form of finance with maturities that extend beyond the period of five years. Most of the investments that are financed in this section are normally for the period of more than twenty years. Onoh (1980), described bond as a credit instrument whereby the corporation receives money from the investing public in exchange for a promise to pay a stipulated rate of interest at specified interval and repay the principal at a set time. From the above, bond is one of the means to finance investment without facing problems of capital.
CONSIDERATIONS FOR INVESTING IN STOCKS:
(1) Decide Your Investment Goal: Don’t jump into the market without first deciding your investment goals. The first task is first of all deciding what tour want to achieve in your investment plan. Your goals may be short term, medium term or long term. You must decide where you belong. It should be noted however that the capital market is originally for long-term investment, but some investor/ traders make money by doing short term and medium term.
(2) Ascertain Your Risk Capacity: Your risk tolerance drives your investment goal. Risk and return goes together. Investors must determine what risks they can afford to accept in their investment, your level of risk tolerance determine your investment goals and the type of stocks to buy. Short-term investors/ traders are high-risk investors.
(3) Watch the Factors that Impact on Stock Market: Interest rate, Government spending/ release of budget, Government policies / regulations, Liquidity control, other factors like war, disaster, etc.
(4) Examine the Variables that Impact on a Particular Company’s Stock: Improved quarterly report/earnings, Improved audit report, Bonus and Dividends, Price Increase in Product and Services, New Product, Invention or Contract:
(5) Keep Abreast with Information on Stock Prices:
Informed investors understand how the financial market actually works and they know how to use the financial knowledge to make money. It is important to separate information from noise. News about a company must be analyzed. As to how the information will affect the profitability of the company and the price of its stock, both in the short and long term. Investors take position to profit from a particular stock based on information. It is good to invest when the news is good but it will be a mistake to invest when the news has already impacted on the price of the intended stock. It is wise to analyze both good and bad news with a view to determining how long its impact will last or has lasted. It is always better to consider whether the information about a stock will improve the company’s performance or whether it will mar the company’s operations. Wise investors invest in bad news by buying low when they are certain that the price of the stock will bounce back within a short time.
(6) Check the Companies Specific Factors: Paid up share capital of the company, Demand for the company’s product, The company’s management as seen in the crop of people that make up the board, The company’s competitive edge or strength, The company’s earnings per share, the company’s Dividend and bonus history.
(7) Understand the Stock Market Behaviours (Bullish And Bearish Sessions):
Bullish sessions occur when stock prices are generally moving up while bearish sessions occur when prices are generally moving down wards. The bullish sessions reverse and give way to bearish sessions when the fundamentals can no longer carry the prices, or when they meet some tough challenges in the reigning industry. The bullish session is usually led by a particular industry. High-risk investors and traders capture opportunities to make profit during bullish session; at intervals they take their profits and diversify.
Bearish sessions are a better time for medium and long-term investors to invest in the company. Generally, short-term investors are better advised to assess the money market. Investors must know the variables behind the existence of a bullish or a bearish stock market. They must ask why the market is up and for how long and why the market is down and for how long. You must know why a particular stock is going down or is going up in order to make profit from the stock price movements.
For example, investors consider seasons in taking investment decisions. The issue is that, prices of stock go down during major festive periods because more sellers will be available than buyers and good investors take advantage of the low prices to invest.
(8) Check for Current Market Drivers:
For example (a) the impact of bonus/dividends on stock, which is what is driving the stock market today. In developed markets, prices react to earnings projections/reports, new products and services, but because the Nigerian market is still not perfect like the developed market, investors in the Nigerian market have greatly profited from news of bonus and dividend in recent times. The implication of this is that Short-term investors profit greatly when the information about the bonus has not fully impacted on the stock price before they take position. They usually sell off their stocks before the stock is marked down and the register of the company books is closed.
(b) Quarterly report/audit report: Quarterly report/audit report has impact on stock prices. For instance, short-term investors, knowing that a company’s quarterly report will be fantastic, take position before the report is released and take profit as soon as the reports are released, and the stock starts to react to the report.
Not all initial public offers (IPO) and private placements are good. You must invest in the fundamentals of the company. Some IPO/Private Placements are overpriced and the stock might not be able to sustain its price after release of certificates. Private placements are most times issued at a discount. Investors must be sure that the company will be listed later on.
Investors are advised to read and digest the prospectus before putting their money. Professional advice is always helpful.
VALUE INVESTING
Value investors are long-term investors. They believe that they buy business and not necessarily stocks. These investors buy stocks to hold for long term. Value investors make profits from investing in quality companies rather than day to day trading.
STOCK INVESTMENT
Diversification means building a portfolio that includes security of different classes e.g. stocks and bonds. Diversification could be in the same class. For instance stocks of different category not affected by same variables e.g. banking stocks, breweries stocks, conglomerate stocks etc.
CLOSING OF BOOKS AND MARKING DOWN
After a company publishes its annual report, it calls for annual general meeting to discuss several issues including dividend if any. In most cases it will be stated when the books of the company will be closed and when dividend payment advice will be sent out. The closure is to ascertain the name of persons that appear in their register for purpose of payment of dividend as at the closure date. The date of closure of register is followed with the marking down of stock. The stocks are marked down because any buyer after that date is buying EX DIV meaning the new buyer will not benefit from that dividend, the former owner before the closure of the books will still get the dividend.
TECHNICAL SUSPENSION
A stock is technically suspended when the price is suspended and as such will not fluctuate. A stock is technically suspended when it is in the opinion of the stock exchange that it will not be in the investor’s interest to trade that stock. Transfers can still take place but at the suspended price. This is often done when a company is going to raise money from the market, or is merging etc.
NSE/CSCS TRADE ALERT
This is a new innovation in stock market that will eliminate fraud in the market. This new protection scheme from the Central Security Clearing System (CSCS) of the Nigerian Stock Exchange will notify you each time your stock is traded through your phone or Email.
The fee is N4500 for 3months, N9000 for 6months and N17,000 for 9months.
BROKERS
Most investors have problems with their brokers because some are not sincere. Investors are strongly advised to use only registered brokers.
NEED TO KNOW ABOUT TRANSACTIONS WITH BROKER
The charge for purchases is a maximum of 3.9%. This could be negotiated lower if you are a big player. The charge for sales is a maximum of N3.9%. This could be negotiated lower if you are a big player.
You must collect official receipt for money deposited for stock; you must complete a purchase order form and state the purchase price range; you must complete a sales order form and state the sale price range; your broker must give you a bought contract note immediately after purchase; your broker must give you a sale contract note immediately after sales; you are entitled to a quarterly statement; you can request for a CSCS statement at a fee of N100; you can confirm your stocks using any of the following numbers 01-2667498, 2640083, 2643939, 2840085, 4705113, 4710441 (just follow the instructions, all you need is yours investor’s number). Verification of certificate is free, however a token of N500 charge might not be exploitative, banker confirmation may be required. You can call the registrar directly should you have problem.
In picking a stockbroker, you need to consider the following: background and credentials, Research and Planning tools – What is the basics of their stock recommendation, How much personalized attention and product you can get, whether you can assess loans though your broker? You should not that the Commission and fees are it negotiable.
CONCLUSION:
It has been said in Financial Success that there is a science of getting rich. There are certain laws, which govern the process of acquiring riches. Once a person learns and obeys these laws he will get rich with mathematical certainty.
The ownership of money and property comes as a result of doing things in certain ways. Those who do things in such certain ways, whether on purpose or by accident, get rich. Those who do not do things in such certain ways, no matter how hard they work or how able they are, remain poor.
Therefore, any man or woman who learns to do things in this certain ways will infallibly get rich. Remember, luck does not occur as a result of a spontaneous happenstance; it occurs when preparations meet with opportunities. You must therefore prepare before you can be lucky.
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