HOW TO INVEST PROFITABLY IN THE NIGERIAN CAPITAL MARKET

      

 

The world of investing is fascinating and intricate. It can be very fruitful. At the same time, it can be risky. Unlike the banking world where deposits are almost always guaranteed by government, stocks, bonds and other securities are not guaranteed.
They are susceptible to losing value depending on market conditions.

Therefore investing is not a spectator sport. However, the best way for investors to protect their investments in the securities markets is by proper and continuous research. Also, they should not shy away from asking questions.

The laws and rules that govern the Nigerian capital market are derived from a simple and straightforward concept: all investors, whether large institutions or private individuals, should have access to certain basic facts about an investment prior to buying and as long as they hold on to that investment.

To achieve this, the Securities and Exchange Commission (SEC) requires public companies to disclose meaningful financial and other information to the public.

This provides a common pool of knowledge for all investors to use to judge for themselves whether to buy, sell, or hold a particular security. Only through a steady flow of timely, comprehensive, and accurate information can people make sound investment decisions.

The result of this information flow is a far more active, efficient, and transparent capital market that facilitates the capital formation so important to Nigeria's economy. To ensure  that this objective is always being met, the SEC continually works with all major market participants, especially the investors, by listening to their concerns and learning from their experiences.

This was, however. missing before Arunma Oteh assumed office as the Director-General of the SEC.  It is common knowledge that lax regulation was largely responsible for the 2008 financial crisis that eroded confidence in the capital market. But  SEC under Oteh has worked hard to restore investors’ confidence in the market.

Though investors also share part of the blame for what happened in the market in  2008' what is most important now is how to get investors to take advantage of the SEC’s investors education drive, redirect their steps by seeking advice from analysts, stockbrokers before investing in the capital market.

In doing so they must define what type of investor they want to be and the approach they want to take. Around the world, there are basically two sets of approach. You either employ technical analysis or fundamental analysis.
Even though the two have nothing in common, one thing is always common, technical investors are always losing money while fundamentalists are always making money.

Need for Fundamental Analysis
Fundamental analysis is based on researching the stock you are going to buy, knowing its financial position and estimating a value for it. Technical analysis is based on charting, where the only reason to buy a stock is finding a good signal in its curve.
Technical investors claim that human behaviour can be easily predicted from charts. While part of what they are saying is true, most experts disagree on the concrete gauge of human behaviour from charts.

Yes, you can expect a stock price to go up because it broke through a strong resistance in the chart. But a new piece of information that is released the next day may have the power to reverse this signal.

Buying a company just because its chart looks good is a far cry from actual investing, it better fits under the act of speculating. Fundamental analysis requires you to know the stock’s financial position, its sales, its net profit and lots of other figures that are directly related to financial performance.

Buying a company because you know about its current financial position and its growth prospects is more likely to make you realise profits than buying a company that you know nothing about just because what you are told looks interesting.

This is why we hear so much noise about prices of equities going down. The people making noise are speculators and not investors who are long term focused.  Investors must understand that using technical analysis for stock selection is like buying medicine from a pharmacy based on a coin toss.

Technical analysis might be useful in selecting the timing of buying a stock but before you decide that you are going to purchase that certain stock you must make sure that it has an underplaying solid business.

Buying a stock or a business
Most investors in the Nigerian capital market were not adequately educated before the banking consolidation. Majority of them did not know that buying into a company requires that they know enough about what they are putting their money into. Most people lose money in stocks because they never notice that they are buying a part of a company by owning its shares.

When you own a great business you will be rewarded by a rising share price and you will make profits. However, if you only depended on the technical charts and forgot about underplaying fundamentals then you are very likely to buy a company that could go bankrupt.
If the company went bankrupt, gossips or market hearsay, technical charts, graphs and the curves will never help you. Only the amount of assets the company has will determine whether you will get your money back or not.

That takes us to a very important question: Is there any rich technical or emotional investor in the world? No there aren’t. All great world investors are those who buy great companies then hold on them.

Day traders, technical analysts and gamblers might make money for a short period of time but in the long run they may end up broke.
The only way to make money out of the stock market is to use fundamental analysis to pick great companies. Depending on technical analysis alone or taking emotional investment decision will only bring you losses.

Need to consult a stockbroker
Because employing fundamentalist approach requires adequate knowledge of the stock market and the companies investors wants to invest in, there is a need to consult a stockbroker, an analyst duly registered by the SEC.
However, investors should be careful when choosing a broker. This is because like every human being, market analysts, stockbrokers and accountants make mistakes.

Investors must not be fooled by the professional look a broker has, which could make you think that he is a stock market guru who never makes mistakes. Unfortunately stock market brokers are normal human beings who make mistakes, who have their own hidden agenda and who give wrong recommendations sometimes.

Just see how large brokerage firms upgrade and downgrade the same stock within few months when they discover that unexpected changes happened. If large investment firms make such big mistakes won’t your broker make them too?

If you don’t have to run your money yourself then you should find someone whom you rely on to run them for you. However, depending on a broker alone in making buying or selling decisions will most likely disappoint you.

So can you invest your money without a broker? Sure you can. When I say investing money without a broker, I don’t mean that there will not be an intermediate brokerage firm between you and the market. I mean that you will be able to make your own buy and sell orders without needing anybody else to do them for you.

The SEC is making this possible by outlining rules that will guide remote trading. However, before you depend on yourself in running your portfolio you must first understand that the stock market is a shared pool of money where those who know more, take money from those who know less.

I am not talking about insider news or hidden information but I am talking about knowledge. The more knowledge you have, the more money you will make out of stocks and vice versa.
This is why every investor must take advantage of SEC’s investor education clinics around Nigeria. It would be a great idea to try reading a lot before buying anything and watching the market for few weeks before taking any decisions. This will enable an investor see where the market is going.

The CIS Option
Another way to play in the market is through mutual funds, otherwise known as  Collective Investment Schemes (CIS). There are several registered mutual funds in Nigeria but investors rarely patronise them. Participation in some other financial markets is higher through mutual funds rather than by direct investment in equities.
For instance, in Brazil, over 10 million investors participate in the market through mutual funds, while only 500,000 invest directly in the market.

Mutual funds are preferred option to enter the equity market because they are regulated and structured for investor protection with independent monitoring compliance, and custodians ensuring safe keeping of the assets.
CIS pools money from different investors that have a common investment objective. It is a form of investment that is accessible to all and it is managed by fund managers, who are professionals in fund and portfolio management.

Each investor has a proportional stake in the CIS portfolio based on how much money they have invested or retained in the pool of funds.
The fund manager invests the money by buying treasury bills, stocks, bonds, or other securities according to specific investment objectives that have been established for the scheme.
In return for putting money into these funds, the investor receives shares or units that represent their pro-rata share of the pool of fund assets.

CIS can take different forms, including money market funds, fixed income funds, equity funds among others.
Money market funds, for instance,  invest in short-term (less than one year to maturity) corporate and government debt securities such as treasury bills, guaranteed commercial papers, bankers’ acceptance, certificate of deposits.
Fixed income funds on the other hand invest in debt securities like bonds, debentures or corporate preferred shares that pay regular dividends.

What to do
There is no guarantee that things will not go wrong, even with the best-laid plans. A long-term investment view will almost always mitigate  risk though all investments are accompanied by a degree of risk.
Just as there are enormous responsibilities placed on stockbrokers, and financial advisers, there is also an enormous responsibility on you, the investor, to find a competent broker who suits your personal needs.

This is going to be a long-term relationship of mutual respect and teamwork, so it is vital to choose carefully and stick to your long-term objectives. Do not be tempted to change brokers in a frenzy of following the latest investment craze.
This will only cost you money and upset your long-term financial planning and objectives. Set your course, choose a good broker and stick to your guns!

Before you go in search of a stockbroker, you need to determine what exactly you want. If you are retired, looking for a balanced portfolio with capital and income growth over the medium term and you wish to be actively involved in the investment process, you need an execution or advisory account.

If you are retiring and have capital to invest that must provide you with an income for the rest of your life and you are not interested in participating in the management of the portfolio, you go for a discretionary account.
There is clearly a vast range of requirements in between the execution or advisory broker and the discretionary broker, and it is essential that you are absolutely clear about what you want.

It is also important to ensure that the investments you wish to make via your stockbroker fit in with your overall financial objectives and your other investments. In determining your stockbroking requirements, you must also consider your annuities, savings accounts, unit trusts and possible tax consequences.