Investing in stocks! What does this really mean?
How do I invest in the Nigerian stock market?
Can I make money by investing in stocks?
These and many others are some questions people interested in investing in the Nigerian stock market ask. Investing in stocks, while not as easy as many make it to appear, is a great passive income opportunity. Why you may ask.
First, if done right, you get to create money on the side while working at your 9 to 5 job or freelancing. Investing in the stock market allows you to pursue other things you love while your capital works for you.
Second, investing in the stock market enables you to build an expanded portfolio of assets. Think about it as the potential to own parts of diverse businesses in different sectors of the economy such as healthcare businesses, utility businesses, entertainment communities. Today, a diversified portfolio is crucial to the success of an investor.
Investing in stocks allows you create wealth on the side while working at your 9 to 5 job or freelancing
Want to know how to invest in Nigerian stocks? You have come to the right place.
In this post, we’ll discuss the stock market, how it works, how to invest in Nigerian stocks, and much more.
So, What Is the Stock Market?
The stock market is an aggregation of stock exchanges where trading of publicly held companies occurs. Traders buy and sell company shares at a set market price. What you need to know is that all stock markets operate under a defined set of regulations.
You can find multiple stock trading marketplaces where buying and selling of stock and other securities occur in one country. The world’s leading stock exchanges include the New York Stock Exchange and NASDAQ. Others include:
- Shanghai Stock Exchange
- London Stock exchange
- Toronto Stock Exchange and our very own
- Nigeria Stock Exchange
The New York Stock Exchange is the largest in the world. Founded in 1792 and with a market capitalization (the total value of all the companies listed on it) of more than $25 trillion as of March 2020. It lists over 2400 companies and accounts for over 40% of the world’s stock market capitalization.
NASDAQ is the second-largest stock exchange in the world. Founded in 1971 in New York City, investors consider it the mecca of technology companies. As of 2020, NASDAQ has a market capitalization of $7.5 trillion.
The Nigerian Stock Exchange was founded in 1961 and, as of November 2019, had 161 listed companies and a market capitalization of $78.5 billion (₦28.26 trillion).
Besides trading company stock/shares, traders can buy and sell other securities. They include exchange-traded funds (ETFs) and bonds. Since the stock market brings investors and traders from around the world, it ensures fair pricing practices. It also ensures the transparency of transactions.
How Does the Stock Market Work?
The stock market can act as a primary or secondary market.
What do we mean by primary or secondary markets? A primary market is a platform that issues new (emphasis on new) securities for companies and other groups. It does so to allow these groups to get financing through equity-based securities (investment types that grant you some ownership). A splendid example is an IPO (Initial public offering or stock market launch) which is a public offering in which we sell shares of a company to institutional investors and also retail investors. This allows companies to issue and sell their shares to the public. The IPO enables companies to raise capital.
To issue shares at an IPO, a company divides itself into several shares. For example, Company A wants to raise capital. It issues 250 million shares. The company then sells part of the 250 million shares (say 100 million – 40% of the company) to investors at a specific market price (say ₦25 a share). If successful, the company will sell the 100 million shares at ₦25 a share. They will, therefore, collect ₦2.5 billion in funds. Investors can hold the shares in hopes the price rises. Meanwhile, they will earn a dividend paid by the company.
You need to know that a listed company can offer additional shares to the public at a later stage. This occurs through follow-on offers such as right issues. They may also delist or buy back their shares. A secondary market is a platform where traders buy and sell securities that are already owned (not newly created or issued). Transactions that occur in the secondary market are secondary because they are a “step removed” from the original transaction initiated in the primary market. If Company A, which raised capital through an IPO in the previous paragraph, were to raise more funds, they would do it through the secondary market. For these activities to take place, the stock market must facilitate them.
Can I Make Money Investing in the Stock Market?
You can make money investing in the stock market as will be explained in our sequel to this blog, “How to make money investing in stocks”. The stock market’s annual average return is 10%. It’s possible for a beginner to create wealth, short-term, and long-term. The problem is most people do not earn that 10%.
Why? You may ask? It’s because they don’t hold their investments long enough to earn the 10% return. If you move in and out of the stock market at awful times, you will miss out on your 10% annual return. To make money in the stock market, follow these tips.
The key to making money in the stock market is to stay invested. You need to take advantage of time. By doing so, you get to earn from the compound interest on your long-term holdings.
To make more money, start building your portfolio early. That means investing as you earn an income. When choosing securities to invest in, consider your risk tolerance. How much are you willing to lose for the possibility of higher returns? If you are not comfortable when your investment takes a short-term dip, it’s best to avoid the investment (not just investment in stocks).
Also, consider diversifying your portfolio. It’s possible that individual companies you invest in will fold or underperform. To safeguard your investment and prevent total loss, diversify your portfolio.
By doing so, you ensure that your investments can weather stock market corrections.
If you invest when you are young, you can build a profitable portfolio by the time you celebrate your 60th birthday. The key is to make regular contributions. This does not take much effort. You can automate the process through your brokerage account.
Alternatively, you can buy low and sell high. Buying a stock at a cheap price and selling at a higher price will net you a decent profit. For this to be possible, you need to use tools such as charts, research, analysis, and stock screeners.
Another way to make money is to short sell stocks at a higher price and buy back at a lower price. Short selling has a high risk-reward ratio. You can earn big profits or make losses quickly.
What you need to know is that short-sellers bet on a drop in a security’s price. For example, a trader believes that Stock XYZ trading at ₦50 a share will decline when the company announces the departure of its superstar CEO (think Elon Musk departing TSLA). The trader borrows 100,000 shares from a broker at ₦50.00, and short sells them in the open market at that same price (generating a sale value of ₦5 million). Six weeks later, the stock is trading at ₦40 on the open market and the trader buys 100,000 shares of the stock for ₦4 million (from the ₦5 million generated earlier), pocketing ₦1 million in profits after returning the shares back to the broker. This example is the minimalist version of the full story as there are a few legalese that go into this process, but I guess you now know what short selling is and how it works.
What Are the Requirements for Investing in the Nigerian Stock Market?
Before investing in the stock market, you must understand your investor profile. Are you a hands-on investor? A hands-off investor? If you are a hands-on investor, then it means the responsibility of choosing how much to invest, what securities to invest in, and other related decisions rest with you. If, however, you are the hands-off type, you can work with Robo-advisors. Robo advisors provide financial advice based on algorithms.
Investing in stocks may seem complicated to beginners, but it won’t be for you if you keep visiting the Investor Hangout and using the tools available, your learning curve would shorten. You can learn how to invest as you build a profitable portfolio. To invest in the stock market, you must fulfill the following requirements.