Stocks and shares – also called equities or ordinary shares – give investors ownership, or equity, of a company. Shares represent a portion of a company’s assets and earnings (capital) though you do not own these assets; the company does, and you have no right to receive any profits it makes unless the board of directors decides to distribute them. As an ordinary shareholder, the extent of your ownership (your stake) in a company depends on the number of shares you own in relation to the total number of shares available.
Your stake may allow you to vote at the company’s annual general meeting (AGM), where shareholders usually receive one vote per share. In reality most private investors’ stakes are quite small and many do not attend the AGM or vote. Their influence over the company is very limited.
A stock exchange is an organisation that provides a marketplace for trading stocks. It also sets rules and regulations that keep the stock market both efficient and fair. Examples are the Nigerian Stock Exchange (NSE), London Stock Exchange (LSE) and the New York Stock Exchange (NYSE)
The stock exchange operates as 2 different markets:
- First, it is a market for Initial Public Offerings (IPOs), which happen when companies who want to raise money offer new shares to investors. Sometimes called new issues, IPOs are for companies entering the stock market for the first time or for companies issuing further new shares. This is called the primary market.
- It is also a market for investors who want to buy and sell existing shares. This is called the secondary market.
As an individual investor, you cannot buy or sell shares directly on a stock exchange. You must place your order with a stock exchange member firm, such as Mountain Investment & Securities Ltd, who will then execute the order on your behalf. You can do this by simply opening a stock broking account.
To be listed on a stock exchange, a company and its shares must pass through the exchange’s approval process. Each exchange has its own particular listing requirements – some are more stringent than others.
It is possible for a company’s shares to be listed on more than one exchange. This is known as a dual listing. Dual-listed shares can sometimes be easier to buy and sell. For example, a dual listing on exchanges in different time zones will increase the hours during which you can buy or sell the shares.
There are two ways you can benefit from owning shares.
One way to benefit is through the growth of the company. Say, for example, Company ABC earns a healthy profit one year. It reinvests this money in the business, perhaps by investing in better technology. This allows it to cut costs and make a bigger profit the following year. If it can continue to improve its profits, demand for its shares will grow and the share price will rise. While you hope that this growth will happen, you have to accept the risk that it might not. The company may even lose money and the value of its shares might fall.
Shares that grow in value are called growth shares and are popular with investors who do not need income from their investments.
Another way to benefit is to receive a dividend from the company. This can generate income for investors. Say, for example, Company XYZ earns revenue of N1, 000, 000. After deducting its costs and reinvesting in the business, it has N100, 000 left over. It decides to return this money to shareholders by paying a dividend. If the company has 100,000 shareholders, each share will get a dividend of N1 per share. So, if you own 100 shares, your total dividend will be N100 (before tax). Stocks and shares that pay dividends are generally known as income stocks. Dividend payments depend on a company’s ability to generate profits – if there are no profits, there can be no dividends. Companies can return money to shareholders in other ways too, such as buying back their shares. This increases the value of the shares still in circulation.
The price of shares is based on demand, which depends on investors’ perception of the company’s future prospects. If other investors feel pessimistic about a company, the share price will fall. If you choose to sell at this point or if the share price never recovers fully, you will get back less than you originally invested. In extreme cases, the company you invest in could go under – become insolvent – and you could lose all of your investment. Some shares are riskier than others. As an investor, you should carefully consider your appetite for risk and select shares you are comfortable with based on this.
Share prices depend on investor demand. Broadly speaking, investors are influenced by news or information – interest rates, new data on employment, manufacturing, directors’ dealings, political events or even the weather can all have a general influence on the way shares move. News on the company itself – its prosperity or lack of it – will also affect its share price.
While investors try to anticipate what is going to happen in the next few months and buy and sell shares accordingly, their expectations can be wrong. When this happens, markets can move very sharply.
If you want to improve your chances of making profitable trades in the stock market, you will need to know what news other investors look at. Here are some examples though this is not a complete list:
- The economy – the health of the global economy influences share prices because it is ultimately responsible for driving profits. Broadly speaking, if the economy is growing, company profits improve and share prices rise. If the economy is weakening, the reverse will happen.
- Company news – this is also a major influence on share prices. For example, if a company puts out a warning that business conditions are tough, shares will often drop in value. But if a director buys shares in the firm, it may be a signal that the company’s prospects are improving.
- Interest rates – although the relationship between interest rates and share prices is indirect, the two generally move in opposite directions. When interest rates are low, investors tend to move away from securities that pay interest, such as bonds, towards shares. At the same time, companies can finance borrowing at a cheaper rate, which might lead to higher profits and share prices. When interest rates are high, the opposite is generally true – investors may move away from shares towards the bonds market and companies are less likely to borrow for expansion.
- Analysts’ reports –- independent analysts release regular reports that recommend buying or selling particular shares, which can in turn influence prices. Investment banks typically produce these reports for their professional investors, although some stockbrokers will make their research available to individual investors. You may find summaries of some reports on financial news websites, newspapers or magazines. Some investment banks also publish their reports on their websites for free.
- Press recommendations – the financial pages of most national newspapers and investment magazines usually contain share tips. Like analysts’ reports, these tips can have a major influence on share prices. If a journalist recommends a share, the price might rise. If they write a negative story the price might fall. These moves usually happen very quickly so if you are going to follow the recommendation it often makes sense to do so as soon as possible.
- Sentiment – – investor sentiment is almost impossible to predict and can be frustrating if, for example, you buy shares in a company that you think has good prospects but the price remains flat. Investor sentiment is influenced by a wide variety of factors. Share prices can be flat during the summer simply because so many major investors are on holiday or attending sporting events – hence the saying ‘sell in May and go away’.
- Technical influences – these include factors that may have nothing to do with the actual outlook for an individual company or market. For example, share prices often drop back after a strong rally. This happens because investors take profits on some of the shares that have risen in value, protecting their gains just in case share prices start to fall. Investors often refer to this as market consolidation.
- Technical analysis – also known as charting – is when investors study past share price movements and trends in order to forecast how shares and stock markets will behave in future. If enough investors are using the same technique, they can influence share prices.
- Market makers – market makers such as Retail Services Providers can also influence prices. If they, for example, do not own enough shares to balance their books they will have to buy more. Market makers also influence prices if the market is looking flat, by reducing prices to attract buyers.
You can buy and sell shares on the floor of the Nigerian Stock Exchange by opening a stock broking account with us. You will also need to complete our Know Your Customer Form (KYC) as part of the mandatory account opening requirement.
A stock market index – such as the NSE ASI– is a way of measuring the value of a section of the stock market. It is calculated from the prices of selected shares, usually the weighted average of the prices of shares included in the index. Investors use stock market indices to better understand broad market trends.
Knowing how to read individual share prices from the financial press is important, but it is equally important to follow general trends. That way you can gauge how individual share prices are performing compared to the market as a whole.
Preferred shares are equity investments that carry some of the characteristics of debt securities (such as bonds). Because of this, they are usually considered safer than the ordinary shares of a particular company. If you hold preferred shares, you will receive dividends and other privileges. It is a different class of share from ordinary shares, and is priced and traded separately.
Anyone can purchase preferred shares, which are generally offered by larger blue chip corporations. Many investors use them as a way to add stability and income to their investment portfolio. Preferred shares can often be converted into ordinary shares at a later stage.
If you are a preferred shareholder in a company, you will be paid dividends before the holders of ordinary shares though this does not guarantee the payment of dividends.
Also, if the company goes bankrupt, your claim on assets and distributions ranks ahead of ordinary shareholders’ claims. Keep in mind, though, that the claims of debt security holders (e.g. investors who hold bonds) are put ahead of those of preferred shareholders.
The dividend payable to ordinary shareholders depends on the overall performance of the company. But with preferred shares, you normally receive a fixed dividend.
Unlike with ordinary shares, with preferred shares you may not get voting rights. And compared to ordinary shares, preferred shares generally grow in value more slowly.
A corporate action is any event that brings material change to stocks and shares. For example, if a company splits or sells off a part of its business as a spin-off; merges with or is acquired by another company; or raises funds via a rights issue.
The ex date – also known as the effective date – is the cut-off point for entitlements to corporate actions. Whoever holds a share on the ex date can receive whatever is being offered. For shares that are traded on the ex date, the seller – not the buyer – gets the entitlement.
Companies generally pay their dividends as cash. Many also give you the option of automatically reinvesting that cash in new shares. This option is known as a dividend reinvestment plan.
Some companies let you choose between receiving cash and receiving an equivalent amount of new shares. A dividend paid out directly as new shares is called a scrip dividend.
A rights issue is a way companies raise funds by issuing more shares. It is called a rights issue because the company’s existing shareholders are usually given the right to purchase the new shares before anyone else, normally at a price lower than the current market price.
Only holders of ordinary shares on a certain date (ex date) are entitled. There will be a ratio that shows you how many new shares you can buy. There is also a call cost – the price to buy one new share under the offer. An example offer might be that for each five shares you hold, you may get the right to buy three new shares at 90k each.
To show your entitlement, the company issues nil paid shares . These can be traded on the market.
This will be stated in the company’s offer document. But in general, fundraising is usually for one of two reasons.
In the first, the company is looking to fund expansion in one form or another – for example, to develop a new product, move into a new market or pay for a takeover. Here, it is up to individual shareholders to evaluate how attractive the company’s plans are in order to determine whether to make a further investment.
The second reason companies look to raise additional capital is to fund their current operations.
You cannot assume that all expansion plans are good, or that business is bad because the company needs additional funding at some stage.