With the Nigerian Exchange (NGX) witnessing growth, many eyes are turning towards the world of stocks. But what exactly are they? And why should you, as a Nigerian, consider dipping your toes into this potentially lucrative arena?
As the local bourse continues its upward trajectory, closing the day on Tuesday, February 20, 2024, with the All-Share Index closing at 101,060.67 points, it’s imperative to delve deeper into the world of stocks and unravel the opportunities present for smart Nigerian investors.
Demystifying stocks:
At its core, a stock represents a small ownership stake in a company. When you buy a stock, you become a shareholder, sharing in the company’s profits and losses. Imagine owning a slice of your favourite bakery or tech startup – that’s the essence of stock ownership.
This ownership grants you certain rights, including voting in shareholder meetings and receiving dividends – a portion of the company’s profits distributed to shareholders.
Stocks are traded on stock exchanges, such as the Nigerian Exchange (NGX), where buyers and sellers come together to transact.
Why should you care?
“As time goes on, I get more and more convinced that the right method of investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes.” – John Maynard Keynes.
Here are some compelling reasons why you should consider investing in stocks:
Wealth creation: Over time, stocks have the potential to generate significant returns, outperforming traditional savings accounts and inflation. The positive movement of the NGX serves as a recent example. Remember, past performance is not indicative of future results. But it does show the potential; as evidenced by the robust market activity on February 20, 2024, with a total of 256.16 million shares valued at ₦6.63 billion exchanged in 8,783 deals, the stock market serves as a vibrant hub of economic activity.
Diversification: By investing in different companies across various sectors, you spread your risk and protect yourself from fluctuations in any single industry. This is why understanding diversified investment strategies is crucial.
Ownership and empowerment: Owning a piece of a company gives you a sense of ownership and participation in the Nigerian economy. You become an active contributor to its growth and success.
Passive income: Some companies distribute dividends to their shareholders, providing a regular income stream without requiring active involvement. This can be a valuable source of additional income.
Taking the first step:
Before diving headfirst, here are some crucial steps to ensure a smooth and informed journey:
Educate yourself:
Understand the basics of stocks, different types of investments, and the risks involved. Numerous resources are available online, through financial institutions, and in libraries.
i. The basics: Stocks are bought and sold on stock exchanges, which are platforms where investors can trade securities. In Nigeria, the primary stock exchange is the Nigerian Exchange (NGX), where companies list their shares for trading. Stock prices are determined by supply and demand dynamics in the market, with factors such as company performance, economic conditions, and investor sentiment influencing stock prices.
ii. Types: There are several different types of investments in stocks, each with its own characteristics and investment objectives. Some common types of investments in stocks include:
Individual stocks: Investors can purchase shares of individual companies directly through a brokerage account. Investing in individual stocks allows investors select specific companies they believe will perform well and potentially generate higher returns. However, it also involves higher risk due to the concentrated exposure to a single company’s performance.
Exchange-Traded Funds (ETFs): ETFs are investment funds that trade on stock exchanges, similar to individual stocks. ETFs typically hold a diversified portfolio of stocks, bonds, or other assets and aim to track the performance of a specific index or sector. Investing in ETFs provides diversification benefits and allows investors gain exposure to a broad market or specific industry with lower transaction costs compared to buying individual stocks.
Mutual funds: Mutual funds pool money from multiple investors to invest in a diversified portfolio of stocks, bonds, or other securities. Professional fund managers oversee mutual funds and make investment decisions on behalf of investors. Mutual funds offer diversification benefits and are suitable for investors seeking a more hands-off approach to investing.
Index funds: Index funds are a type of mutual fund or ETF that seeks to replicate the performance of a specific market index, such as the S&P 500 or the FTSE All-World Index. Index funds aim to match the performance of the underlying index rather than outperform it. They offer low fees and broad market exposure, making them suitable for investors seeking long-term growth and passive investment strategies.
Sector funds: Sector funds invest in companies operating within a specific industry or sector, such as technology, healthcare, or energy. These funds allow investors focus their investments on a particular area of the economy they believe will outperform the broader market. However, sector funds may be more volatile and carry higher risks compared to diversified funds.
Dividend stocks: Dividend stocks are shares of companies that regularly distribute a portion of their earnings to shareholders in the form of dividends. Investing in dividend stocks can provide investors with a steady stream of income in addition to potential capital appreciation. Dividend-paying companies are often mature and stable companies with a history of consistent profitability.
iii. Risks: Investing in stocks can offer significant potential for long-term growth and wealth accumulation, but it also comes with certain risks that investors should be aware of. Some specific risks involved in investing in stocks include:
Market risk: Market risk, also known as systematic risk, refers to the possibility of overall market fluctuations impacting the value of investments. Factors such as economic conditions, geopolitical events, interest rate changes, and market sentiment can all affect stock prices. Market risk affects all stocks to some extent and cannot be diversified away.
Company-specific risk: Company-specific risk, also known as unsystematic risk, pertains to risks that are unique to individual companies. These risks can include poor management decisions, operational issues, changes in industry dynamics, competitive pressures, and legal or regulatory challenges. Diversification across different stocks can help mitigate company-specific risk to some extent.
Volatility risk: Volatility risk refers to the degree of fluctuation in a stock’s price over time. Highly volatile stocks may experience large price swings in response to market events or company-specific news, which can lead to increased uncertainty and potential losses for investors. Investors with a low tolerance for volatility may prefer to invest in less volatile stocks or diversify their holdings.
Liquidity risk: Liquidity risk arises when there is insufficient trading activity or market depth for a particular stock, making it difficult for investors to buy or sell shares at desired prices. Stocks with low liquidity may experience wider bid-ask spreads and higher transaction costs, potentially impacting investors’ ability to execute trades efficiently.
Interest rate risk: Interest rate risk refers to the impact of changes in interest rates on stock prices. Generally, rising interest rates can lead to lower stock valuations as investors may shift their capital to fixed-income investments offering higher yields. Conversely, falling interest rates may stimulate stock prices by reducing borrowing costs and improving corporate profitability.
Currency risk: Currency risk, also known as exchange rate risk, applies to investors who hold stocks denominated in foreign currencies. Fluctuations in currency exchange rates can affect the value of investments when translated back into the investor’s home currency. Currency risk can add a layer of volatility and uncertainty to international stock investments.
Political and regulatory risk: Political and regulatory risk arises from changes in government policies, regulations, or geopolitical events that can impact stock prices and market stability. Political instability, trade tensions, changes in tax laws, and regulatory reforms can all influence investor sentiment and market performance, particularly in emerging markets.
Start small:
You don’t need a fortune to begin. Start with a small investment to gain experience and confidence before increasing your involvement.
Seek professional guidance:
Consider consulting a financial advisor to create a personalised investment plan based on your goals and risk tolerance. Remember, professional advice is crucial for responsible investing.
Embrace long-term thinking:
Building wealth through stocks is a marathon, not a sprint. Be patient, stay disciplined, and avoid impulsive decisions based on short-term fluctuations.
While the provided statistics showcase the recent positive movement of the NSE, always remember to conduct thorough research and consider the risks involved before making any investment decisions. This article is for informational purposes only and does not constitute financial advice.
Reach out to a financial advisor here to invest in shares.