Stock Market Investments

Earlier this year we noticed that the equities market was being battered by the effects of COVID 19 lockdown. Blue chip stocks were highly underpriced and activity in the stock markets was discouraging. We advised that investors should take advantage of the low prices and buy good quality stocks at bargain prices. Those who acted on the advice would be smiling to the banks now; whether they chose to sell the stocks (and cash in the profit) or keep the stocks (resulting in a larger portfolio size and personal networth). Stock markets globally are doing well. The Nigerian Stock Market is doing particularly well because of the incredulously low returns offered by its main alternative, the Money Market. Bank deposits and Federal Government Treasury Bills are paying below 3% returns per annum. This trend is likely to continue into the medium term unless a major even changes its trajectory. The Central Bank of Nigeria (CBN) recently reduced its Money Policy Rate (MPR), thus sealing the hope for increase in money market returns. All these have resulted in a renewed interest in equities.

Here is a reminder of the four most basic considerations when buying equities-investment objectives, risk appetite, investment tenure and ethical considerations. Investment objectives define what we want from the investment – cash payouts (via dividend), wealth growth (through increase in share price) or both. An older person may be more interested in cash payout whilst a younger person may want to concentrate on wealth building.

Risk appetites define how well we can tolerate the fluctuations that accompany share prices. If we are very risk averse, it’s best to avoid the stock market all together and choose investments that assure us of principal and profit.

Investment tenure defines how long the investment is for. Since share ownership is ownership in the issuing company, then the relationship should be medium to long term.

Ethical considerations have to do with your attitudes towards companies involved in things like tobacco, child labor or environmental degradation.

When picking stocks, remember to pick companies you are familiar with their business e.g. household names. Companies with a wide customer base that can guarantee continuous flow of revenue to the company. But since the relationship is medium to long term, a company’s situation may change. So, follow your company in the news; read about their activities. Make financial projections from those developments. If for instance, one reads that CBN is repeatedly sanctioning a bank in which one has invested, we can safely conclude that the bank has management problems, which could ultimately lead to financial distress. It is best to move one’s investment to a more professionally run bank. When bad news about a company emerges, make a decision quickly on whether to sell the stock or ride the storm, because the first thing that suffers from bad news is a company’s stock price.

Before buying at this time of turbulence, ensure you do a thorough due diligence. Consult your stockbroker and get advice not only on the individual stocks you want to buy but on the sectors. When investigating individual stocks find out their dividend pay-out patterns, stock price growth, management profile etc. If you have a “cowboy” managing a good business, it could soon take a nosedive. Read about the regulatory stance towards the sector; are government policies favourable to it? Are there are new policies that could adversely affect their future performance?

If you do not have the time or motivation to do the necessary due diligence, buying Mutual Funds may be a wise alternative. A Mutual Fund is a professionally managed pool of funds collected from many investors for profitable investment in different types of investment vehicles (as guided by the fund’s investment objectives).They are also known as Unit Trusts.  Dividend is periodically paid to each subscriber based on their holding in the fund. Buying into a Fund that specialises in equities enables the investor to gain several benefits immediately – professionally executed due diligence, portfolio diversification, low cost of entry, professionally managed portfolio etc. Like all investments in the stock market, the value of an equities-focused mutual fund fluctuates, because the components of the fund (equities) fluctuate. However, a well-managed equities fund is able to return higher returns than the market average.

The stock market is a major vehicle for wealth creation and income generation for most investors. Some people have lost a fortune but many more have been enriched by it. Empower yourself with relevant information, work with the right partners and do your due diligence before, during and after you commit your finances to any stock. Happy investing.

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