HOW TO INVEST IN STOCKS FOR BEGINNERS, EVEN IF YOU DON’T KNOW ANYTHING ABOUT THE STOCK MARKET
My stock market journey began in 2005 when the market was at its peak. Every stock’s price was high and increasing daily. Like many, I “took advantage” of this opportunity and bought as many stocks as I could afford, not bothering to check the fundamentals of the stocks, especially since the market was doing well. Companies were promising their shareholders lots of fortune in exchange for their token investments and I was not willing to be left out.
It wasn’t long before I realized the great disservice I had done to myself thinking I was being smart. The global recession that began in the United States of America rapidly spread to the rest of the world, engulfing the Nigerian Stock Market as well. At first, I observed that the bad stocks (i.e. stocks from companies with poor fundamentals) were the first to be affected and started reducing in price.
One particular example was the Afribank and Intercontinental Bank stocks I had purchased. I didn’t know these banks were not making profits annually, and as a matter of fact, they were in debt and were stressed. But because the bull market kept raising their prices daily, I assumed they were healthy. Being the diehard optimist that I am, I hoped for the rebound of their stock values, in order to recoup my investment, but then it began nose-diving daily to the point where it almost became zero, and my greatest fear became my reality. I lost all my investments in the stock market.
I was devastated by the turn of the event but in hindsight, I am glad I had that experience because it has made me a better person in stock investment.
Due to that experience and my 15 years of knowledge in the stock market investment, I have not lost a dime again because I can now differentiate between good stocks and bad stocks.
One thing I learnt was that the bull market is not the best time to buy stocks. I also learned what to look for in a financial statement of any company before deciding on which stocks to buy and which stocks to avoid.
FREQUENTLY ASKED QUESTIONS
(1) WHAT IS STOCKS/SHARES: It can also be referred to as shares, equity, or security. A stock is part ownership of a company. Stock represents a claim on the company’s assets and earnings. When you buy stocks, you buy part ownership of the company and as you acquire more stocks, your ownership stake in the company becomes greater. In other words, the more stocks or shares you buy in a company, the greater your level of ownership of that company. This also determines how much dividends you will receive from that company whenever it declares profit. A third, and probably the greater benefit of being a shareholder is your ability to influence decisions made by the company. So, the greater the number of shares you own, the more influence you will have in the day-to-day running of the business.
(2) STOCK MARKET/EXCHANGE: This is the place where stockbrokers meet to buy and sell shares or other securities.
(3) SHAREHOLDER: A shareholder or stockholder is an individual or institution that owns shares in a private or public corporation. Being a shareholder is the greatest method ever invented to allow the masses participate in the growth and prosperity of a company. If, for instance, you buy some MTN shares, anytime you make call or someone makes a phone call on MTN network, some of the profit will end in your pocket as dividend. Shareholders vote for corporate board members and certain business decisions. They also receive annual reports to know the financial status of the company every year.
(4) PENNY STOCKS/GROWTH STOCKS: These are stocks that are priced below of N5. Examples of penny stocks are Fidelity Bank PLC, FCMB PLC, UAC Property PLC, Honeywell Flour Mill PLC etc.
The advantage of these stocks is that they can multiply your money to a higher percent. For instance, if you buy Fidelity Bank shares at N1.50, it is very easy for the price to go to N6 thereby giving you 400% increase, but it won’t be easy for blue chip companies to increase that far.
(5) BLUE CHIP STOCKS/INCOME STOCKS: A blue-chip stock is the stock of a large and financially strong company. They are priced above N5 and some sell as high as #800, #350 and #130. Companies with blue chip stocks include Nestle PLC, Dangote Cement PLC, Airtel Africa PLC, MTN Nigeria PLC, GTB PLC, Zenith Bank PLC etc. The advantage of owning them is that they consistently pay their shareholders dividend and this can be a good source of passive income.
(6) DIVIDEND: This is the percentage of a company’s profit that is paid to its shareholders. It is usually done annually or sometimes both at the middle of a business year (June), and at its end (December). So, most times a company sells its shares to expand its business which makes it get bigger thereby selling more products to more customers which increases their profit. As the company gets bigger and more prosperous, its shares become more valuable, so the investors are rewarded with Dividend for buying their shares and investing in the company.
(7) CAPITAL APPRECIATION: This is the increase in price of a company’s shares. It could be as a result of an increase in demand for that company’s, or due to its profitability. When more people want to buy shares in the company, it could make the price of the shares go up. Conversely, if the company is badly managed, and they aren’t profitable or do not pay their shareholders dividends, it can discourage people from purchasing their stocks and might lead to a devaluation of the stocks price.
Now that we have covered some of the most common terms used, let us look at two more, both of which are relevant when it comes to purchasing stocks.
(8) PUBLIC OFFERING: When an organization sells part of her shares to the public in order to raise funds for business expansion and further investment, it is said to have made a public offer to the masses by giving them the opportunity to invest in the company in exchange for part ownership of the said company. This can be bought when the organization is selling the shares to the public and you can buy through the issuing houses or banks that are helping them to sell it.
(9) STOCKBROKER: A stockbroker is a professional who helps you to buy and sell shares from the stock market.
(10) REGISTRAR: Registrars are responsible for record-keeping of shareholders for the company. For instance, the registrar of GTB is Datamax.
(11) SOME OF THE LARGEST COMPANIES IN NIGERIAN STOCK EXCHANGE
We have more than 300 companies listed in The Nigerian stock exchange, some of them are:
- MTN NG PLC
- Dangote Cement PLC
- Airtel Nigeria PLC
- Nestle Nigeria PLC
- Guaranty Trust Bank PLC
- Zenith Bank PLC
- Nigerian Breweries PLC
- Stanbic IBTC PLC
- Access Bank PLC
- Seplat Petroleum PLC
- UBA Bank (and more than 300 other companies)
(12) WHAT ARE THE BENEFITS BUYING SHARES
Contrary to public opinion, buying shares isn’t as complicated or difficult as most imagine. Stock investment is one of the simplest forms of investment. It is also quite lucrative if have adequate knowledge of how it works. The best thing about stock trading is that it is a convenient way to secure a comfortable future for yourself and your family and it can be done passively too. Think about it: You are not involved in the day-to-day running of the company so you don’t have to worry about paying salaries, or overheads, or marketing strategies, yet you benefit from the profit made by that company. What could be more passive than this form of investment?
You can even implement the things I’ll share right away and get immediate results. It is that simple. You will be smiling to the bank if you implement what I teach you. Let’s consider some of the ways investors make money off the stock market.
(a)Dividend (Profit): Dividend is the return you earn from a company from its profit for a particular year. It is usually paid once or twice each year. Now dividends are as great as the profitability of the company. The more they make in profits, the more they can give as dividends and vice versa.
Companies always give their financial report quarterly (i.e. every 3 months), and at the end of the financial year, they may decide to share part of their profit with their shareholders. For instance, Zenith Bank gave #2.50, while Guaranty Trust Bank (GTB) gave #2.40 at the end of the year 2018.
Sometimes some good profitable companies pay half-year dividend or interim Dividend to their shareholders. For instance, GTB declared an Interim Dividend of #0.30 at end of June, 2019. While MTN declared #2.95 as interim dividend at the end of June, 2019. This is different from the dividend given at the end of the year known as final Dividend. You might think this is a small amount, until you multiply that dividend by say, 100,000 shares. In the case of GTB’s and MTN’s interim dividends, that’s about #30,000 and #295,000, respectively, earned passively. I think by now you have a fair understanding of how this works.
One advantage of stock is that you don’t have to partake of the day to day activities of running the company. Last year many rich investors received billions of naira as dividends for being a shareholder without putting any efforts aside clicking the buy button. The more shares you own, the more dividend you will receive at the end of the interim declaration and final year declaration.
(b) Capital Appreciation: It is the increase in purchase price or value of a stock. Assuming one unit of Zenith Bank shares cost #20 and you bought 100,000 units which is a total of #2,000,000 and after 3 months the price of the stock go up to #25. It immediately implies that if you were to sell your shares, you would sell them for a total of #2,500,000, giving you a gain of #500,000. That is what is called capital gain.
How Capital Appreciation Works
- Buying Low And Selling High: This is one of the old strategy of making money in the stock market. For example, let’s say you are interested in Fidelity Bank Nigeria PLC stocks and it is selling for N1.50 and you bought 50,000 units of shares.
- The total cost of purchase will be N75,000 and the said company released an amazing financial report at the end of the year which raise the demand of the stock and as a result the price now moved from N1.50 to N4.50 because of the positive report. Selling at N4.50 will give you 200% return on investment. So your total money will be N225,000. A gain of N150,000.
- Buying High And selling Higher: Good news is the pendulum that swings the prices of shares from lower price to a higher price. Let’s say the government issues a policy that everybody must use only MTN line. This news will surely increase the price of their shares. The price might move from N120 to N300 and because of the positive news. People will start buying because they are optimistic that the price will move higher because of the monopoly they are enjoying. So buying at N120 will still be a good bargain for you because you are optimistic that the price will continue to move higher. That’s a typical example of buying high to sell higher.
(c) Bonus shares: At the end of the year, very few companies give both dividends and bonus shares to all their shareholders as ways of motivating shareholders which means that they give you free shares in addition to those you own. Some companies may give 1 share for 4 shares you own. So, going by our Zenith Bank example, for the 100,000 shares that you bought, you will receive bonus shares of 25,000 bringing the total number of shares you own to 125,000.
(d) Shareholders Meeting: Being a shareholder in a company will give you the opportunity to attend their annual shareholder’s meeting where you can ask questions and also contribute to how to make the company more profitable. You also get the added bonus of meeting and interacting with other investors like yourself, from whom you can learn about new investment opportunities.
(13) HOW MUCH CAN I START INVESTING WITH: You can start as low as #10,000
(14) WHEN WILL I BE PAID MY DIVIDEND
- When Half Year Result is declared
- When Full Year Result is declared
Shown below are examples of two banks that declared their half-year financial account recently:
(a) Zenith Bank Half Year Result For 30th Of June, 2020
- Zenith Bank declares Profit before tax (PBT) of N114.124 billion
- Profit After Tax of N103.826 billion
- Profit per share is N3.30
- The bank also proposed an interim dividend of 30 kobos per share.
- The register closure date is September 17th, 2020.
- The dividend payment date is September 22nd, 2020.
(b) GTB Half Year Result For 30th Of June, 2020
- GTBank declares Profit before tax of N109.714 billion
- Profit After Tax of N94.271 billion
- Profit per share is N3.32
- The bank also proposed an interim dividend of 30 kobos per share.
- The register closure date is September 16th, 2020.
- The dividend payment date is September 21st, 2020.
An e-dividend interim report was also sent to me from GTB Registrar. See below
(15) ANALYSIS OF THE ABOVE REPORT (GTB AS AN EXAMPLE)
We realized that GTB bank declared a profit after tax of N109.714 billion billion for 6 months that is from January to June 2020.
And a profit per share of N3.32.
Thirdly, they are giving out N0.30 as profit to their shareholder for that 6 months (they will still give for the full year in December)
If you are able to buy their shares before September 16th, you will partake of the dividends and every shareholder will get a credit alert on the 21st of September, 2020.
(16) HOW DO I RECEIVE MY PAYMENT: You will get your dividend via e-dividend where they will credit your account directly. All You have to do is to register with the registrar of the company and whenever dividend is paid, you will get credited instantly.
(17) I HAVE SHARES BUT I AM NOT RECEIVING MY DIVIDEND: You have not registered for e-dividend. Go to your company registrar and register for e-dividend, your account will be credited whenever the dividend is paid. You will also get credited for all outstanding payments as well.
GTB registrar is Datamax Registrar
Zenith Bank Registrar is Veritas Registrar
Stanbic IBTC Bank Registrar is First Registrar
NOTE: This is not the complete knowledge of the stock market. It is much more than this, all we did was that we just tried to answer some of the frequently asked questions we received most times.
For instance, we still have
- How you can register with a reputable stockbroker that can help you purchase your shares.
- How you can buy your first shares.
- How dividends are paid directly into your account if you own shares.
- How to pick the right shares.
- Also, we are unable to cover when is the right time to buy shares. and the right time to sell your shares and other analysis as well.
You can find the remaining information in our e-book titled ” Nigerian Stock Market Investment Guide”.
It is a basic guide for beginners who don’t have any experience in the stock market and wants to start investing in the stock market and let their money work for them.
It explains in simple and greater detail how the stock market works.
It reveals the principle of sound investing such as analysis of the market Also, it unveils stocks that are very profitable to buy and which stocks are not profitable.
Get the e-book here >>>
Get the e-book here >>>