investing in stock:
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INVESTING IN STOCK:. TIPS FOR THE MOTIVATED INVESTOR. UBA Securities limited. 1. Outline. 2. 3. 4. Introduction Definition of stocks Reasons to invest in the Stock Market Steps to take before investing in the stock market Quick and easy ways to value a stock InvestNow. 5. 6. - PowerPoint PPT PresentationTRANSCRIPT
UBA Securities limited
INVESTING IN STOCK:
TIPS FOR THE MOTIVATED INVESTOR
UBA Securities limited
UBA Securities limited
Outline
Introduction
Definition of stocks
Reasons to invest in the Stock Market
Steps to take before investing in the stock market
Quick and easy ways to value a stock
InvestNow
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Introduction
Investing can take various forms, one can decide to invest in;
Financial products
Family
Business
but the one thing common to all investments is; some elements of sacrifice and
an expectation of reward.
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Factors that may affect investment decisions
Fear: that the money invested may disappear or return in a lesser amount.
Other factors include:
Economic uncertainty
Unattractive interest rates
Political instability
but the importance of investing cannot be over emphasized because
Investment + savings + consumption + (Export – Import)= Aggregate Demand
Increase in aggregate demand can lead to increase in economic growth.
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Types of Investments
Lending investment : includes investing in bonds
Cash equivalents : includes investing in money market funds
Ownership investment : includes investing in stocks( equities), real estate, business
and precious objects
Ownership investment poses to be the riskiest but also the highest rewarding
type of investment. For instance; bonds issued by a company may pay a
certain amount over a period but the value of stocks has the propensity to
triple or fall flat during the period.
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Factors leading to misconceptions about investment in equities
Even though stocks have the propensity to triple during a period, many people still focus on
its ability to decrease in value due to:
Misinformation on the stock market
Lack of adequate knowledge about the stock market
Thus, many people miss out on potential high returns that can be gained from
investing in the stock market.
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What are stocks?
Simply put;
Stock is an equity investment.
It is a share in the ownership of a company.
It represents a claim on the company’s assets and earnings.
As such, it represents the capital raised by a business or corporation through the
issue of shares.
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Capital growth
• This involves building wealth through stocks.
• It occurs when individuals experience capital gains from the shares they possess
through an increase in the share prices.
Reasons to invest in the stock market
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Capital growth
For instance, if one bought 30, 000 units of shares from company XYZ for N6.00 (Six
Naira) per share and demand for the shares increases, this makes the price increase
to N50.00 (Fifty Naira).
This means that the value of the shares is now N1,500,000 (One Million Five
Hundred Thousand Naira) compared to its value of N180,000 (One Hundred and
Eighty Thousand Naira) . Thus if one decides to sell the shares, a gross profit of
N1,320,000 (One Million Three Hundred and Twenty Naira) will be made, that is of
course, excluding taxes and commissions.
Reasons to invest in the stock market
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Reasons to invest in the stock market (contd)
Capital growth
• can also occur through the issuing of free or bonus shares by a company to its existing
shareholders.
• A typical illustration was when First Bank of Nigeria declared a one-for-one
bonus in the first quarter of the year 2007, which resulted in a unit given for
every First Bank shareholder as at the date of the declaration. Thus, a First
Bank shareholder with 100,000 units of shares became entitled to another
100, 000 units, increasing the value of his shares to 200, 000 units .
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Reasons to invest in the stock market (contd)
Good hedge against inflation
• Investing in the stock market can protect one’s assets from the adverse effects of
inflation.
• For instance, consider an individual who has N10, 000 cash and decides to
hold it, rather than invest it. Assuming, the Central Bank of Nigeria plans to
keep inflation rate at 9% per annum for the next five years, this means that
the purchasing power of the N10, 000 cash will keep reducing over the next
five years.
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Reasons to invest in the stock market (contd)
Dividend Income
• This can be described as the cash reward given to shareholders as part of the profit
made by the company at the end of each financial year.
• It is highly valued by investors and is viewed as income from the stocks invested in.
• More so, dividend paying stocks have some of the biggest profit opportunities and
also have growth prospects because companies with weak earnings cannot pay out
dividends.
• Even after the global financial crisis in 2008, companies listed on the
Nigerian Stock Exchange (NSE) still continue to reward investors with
dividend payments, at least 75 and 73 quoted companies on the NSE paid
out dividends to its shareholders in the year, 2011 and 2013 respectively.
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Reasons to invest in the stock market (contd)
Some facts about dividend income
• A company may decline to pay or defer dividends not necessarily because it is
financially unstable, but for the alternative purpose of reinvesting the money into the
company for increased productivity.
• Dividends paid out are subject to double taxation by the government because the
companies issuing out the dividends and the shareholders of the respective
companies have to pay taxes on the dividends, whereas, if companies use the money
for reinvestment purposes, then tax is paid on the money once.
• .
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Reasons to invest in the stock market (contd)
Some facts about dividend income
• Dividend yield is a very important factor to consider when considering companies
that pay out dividend, it is a financial ratio that shows how much a company pays
out in dividends each year relative to its share price, it can be used to compare two
or more companies.
• It should be noted that some companies experiencing difficult times may
raise their dividend payout to appear more attractive. Thus, payment of
dividends does not on its face value determine its financial status, it
remains crucial to ascertain the real financial state of affairs of any
company in deciding questions of investment or financial transactions.
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Avoidance of Capital Gains tax • From1998, proceeds from the sale of stocks are exempt from Capital Gains Tax (CGT)
in Nigeria unlike other assets.
• However, there are minimum fees that are still charged by stockbrokers when a
purchase or sale of stock is made but these fees are uniform and are approved by the
Security and Exchange Commission (SEC), the regulatory authority for activities on
the stock market. The fees are charged by the SEC, the NSE (Nigerian Stock
Exchange) the CSCS, (Central Securities Clearing System Plc) and the stock broking
firm involved.
Reasons to invest in the stock market (contd)
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Some facts about fees charged by stockbrokers
• In a bid to make the capital market more attractive, the Federal Government is working on reducing the charges paid by investors.
• In December, 2012, the Minister of Finance, Dr. Ngozi Okonjo-Iweala implied this and also
stated that the Federal Government had decided to waive the fees charged for stamp duties
and exempt from VAT, commissions
(a) earned on traded values of shares,
(b) payable to the Securities and Exchange Commission, and
(c) payable to the Nigerian Stock Exchange and the Central Securities Clearing System, by
including these commissions in the list of VAT-exempt goods and services.
Reasons to invest in the stock market (contd)
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Diversification of Portfolio
• Diversification of one’s portfolio is also one of the reasons to invest in the stock
market because a diversification of products is essential in order to minimize risk,
maximize return, (at least a return as close as possible to one’s target).
• In order to diversify one’s portfolio, it is a good idea to have part of one’s money
invested in the share market.
• It is also a known fact that listed shares are a very liquid product, the process of
buying and selling them is relatively easy and quick and a stockbroker can do this for
investors or interested sellers at a low cost.
Reasons to invest in the stock market (contd)
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Special Discounts
• some listed companies in many sectors offer special discounts to their
shareholders when they buy goods or services from them or even their
subsidiaries.
• However, most cases require the shareholders to have acquired a minimum
bundle of shares in order to qualify for these discounts.
Reasons to invest in the stock market (contd)
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Steps to take before investing in the stock market
Analyse the financial Statement
• The first step to take is to study the Financial Statements of the company/companies.
This step should be taken once one has an idea of the type of company one wishes to
invest in.
• It is very easy to get confused because there are so many documents released to
investors by companies. These documents usually contain so much information and
although every piece of information is important, there are some that are more so
and very useful in investment decisions. Some are highlighted on the next slides;
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Revenue
• This is one of the most important figures to look out for.
• The revenue is the inflow of or cash made by a company the sales of products or from
services. It is usually found at the very top of an income statement.
• This figure is very important because it indicates whether a company is growing, stagnant
or in decline. One can look at previous income statements of a company and check if the
revenue figure has been growing through the past years.
• It should be pointed out that it is not realistic to expect a company to increase
its sales every single year. However, a consistent low and declining annual
revenue figures is an indication that the company has problems selling its
products or services.
Steps to take before investing in the stock market
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Net Income and Profit Margin:
• While the former depicts the amount of money a company earned from sales after
expenses and taxes have been paid, the latter represents the percentage of revenue
the company takes in as profit.
• A company that can effectively sell its products and at the same time, manage its
operating costs properly will have a growing net income each year.
• Likewise, a company that has steady growing profit margins shows that people are
willing to pay high prices for its products.
• Nevertheless, there are some companies that do not charge high prices but still
maintain growing profit margins, this is because such companies are good at
managing their operating costs.
• Ultimately, companies that have growing profit margins will be able to reward
shareholders with returns.
Steps to take before investing in the stock market
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Cash Flow Trends
• ‘ Profit is a matter of opinion. Cash is a matter of fact’.
• Cash is the engine that drives a business, it is money in hand, not the result of
accounting measurements. It is of high significance to any potential investor because
what a company records as its revenue on its income statement may not tally with the
amount of cash it actually has.
• The cash flow measures the amount of cash that a company brings in and uses during
the course of an accounting period after the elimination of all fixed expenses and is
best understood when it is compared to the cash flows of other companies in the same
industry and to the stock market.
Steps to take before investing in the stock market
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Cash Flow Trends
• There are three main components of a cash flow statement; cash flow from operating,
investing and financing activities.
• The cash flow from operating activities is most important as it signifies the amount of
money generated by a company’s core activities, this is noteworthy because it shows
whether the company can make a profit on its core activities.
• It is important to note that a company’s cash flow may not always be positive
and this is not always necessarily bad, it may simply mean the company is
investing more into its business for growth purposes.
• Likewise, a positive and high cash flow is not always necessarily good because
it may simply mean that the company is selling off its assets.
Steps to take before investing in the stock market
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Quick and easy ways to value a stock
Price to earnings ratio (P/E):
• This ratio is probably the most common way to value a stock.
• It is the ratio of the market price of a stock to its earnings per share and it gives an idea of
what the market is willing to pay for a company’s earnings.
• For instance, if a stock of a company is trading at 10 Naira per share and has
earnings of 2 Naira per share, then the stock has a P/E ratio of 5, this implies
that the market price of a stock must not be more than 5 times its earnings per
share.
• This stock may be overvalued but before such a conclusion can be drawn, a comparison
has to be made between P/E ratios of companies in the same sector or the sector itself as
different sectors have different P/E ratios that are considered normal.
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Price to earnings ratio (P/E):
• A P/E ratio higher than the P/E ratio of other companies in the same sector or the sector itself,
could indicate that the market has high hopes for the stocks future and is willing to pay a
higher price for it because there is a high potential that the company will enjoy increased
earnings in the future.
• It is generally wiser to invest in a company that has a P/E ratio which is at par with or higher
than the P/E ratios of other companies in the same sector or the overall sector’s P/E ratio.
• The major limitation of the P/E ratio is that it does not take cognizance of other components
of a stock except the price and the last released earnings per share of a company.
• As a result, it is considered to be flawed and a better variation of it is the price to earnings
growth ratio.
Quick and easy ways to value a stock
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Price to earnings growth ratio (PEG)
• This is considered a better variation of the P/E ratio because it takes into account the
potential or future growth in earnings of a company rather than just the present earnings.
• As said earlier, a company with a high P/E may mean that the market believes the company
has future growth prospects in terms of earnings. This suggests that the market is more
concerned about the future earnings growth of a company and the PEG can help in factoring
this into the valuation of a stock.
• The PEG ratio divides the P/E ratio of a stock by its potential earnings growth and there is a
rule of thumb which states that any PEG ratio below 1 is undervalued, above 1 is overvalued
and equal 1 is fairly valued, which means that for a company to be fairly valued, the P/E ratio
of a company should be equal to its potential earnings growth.
Quick and easy ways to value a stock
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Price to earnings growth ratio (PEG)
• Assuming, company A currently has a P/E ratio of 20, compared to its sector‘s
P/E ratio which is 10, this suggests that this stock is expensive but according to
analysts, company A is likely to experience a 30% increase in earnings per share
next year, which brings the PEG ratio to 0.67.
• From the P/ E ratio it seems the stock is expensive but based on the PEG ratio, it is
undervalued relative to its growth potential.
• However, the PEG ratio has limitations because it deals with forecasting earnings figures
and analysts who publish this numbers are normally too optimistic.
• Thus, there is a high probability of many companies not meeting their projected growth
rates and investors who have invested in such companies based on good PEG ratios now
have an overvalued stock on their hands.
Quick and easy ways to value a stock
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Dividend yield
• Investing in dividend paying stocks has some growth prospects and even when share
prices drop, there is still a high probability of getting a pay check from a dividend paying
stock.
• The dividend yield then calculates what percentage an investor earns as dividends in
relation to the share price of the respective company. It is calculated by dividing the stocks
annual dividend by the stock’s price.
• Normally, older and well established companies tend to pay out consistent dividends with
a higher percentage than younger companies.
Quick and easy ways to value a stock
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Dividend yield
• Dividend yields can vary across industries and as such it is best to compare
dividend yields of companies within the same industry.
• In Nigeria, quoted companies usually pay out dividends with a yield
averaging 5% but one can look for companies that pay out dividend with
yields higher than the inflation rate so as to hedge returns against inflation.
• Dividend yield is not without its limitations, a high dividend yield
could mean the stock price of the respective company has reduced
and when the investor wants to sell, this may pose a problem.
Quick and easy ways to value a stock
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Combination is the key to better stocks
There are many more methods of evaluating a stock, but the most common and basic
methods have been analyzed.
However, these methods have to be combined to get a better view of the worth of a stock.
Other factors can also be considered when looking into a company such as past
performances, government influence, management team and market sentiments.
On a final note, it is worth mentioning that that there is no perfect method of choosing the
right price for a stock but these methods mentioned above will go a long way in helping a
potential investor understands the stock market better and will always be useful for
finding out whether a stock is worth buying.
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Made up your mind to invest?
INVESTNOW
• Have you made up your mind to invest in the stock market?
• UBA Securities is offering an online trading platform called INVESTNOW, where
interested investors can invest in the Nigerian stock market.
• A brokerage account is required to start trading in the stock market and the
minimum amount required to open this account is zero Naira.
• You can log on to the website through this link
https://investnow.ubacapitalgroup.com/inside.php and click on ‘enter
investnow’.
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INVESTNOW
INVESTNOW
• When you are in, scroll to the left of the page, when you click on ‘brokerage account’ it
gives you information on all the documents you will need to open the account.
• Next, you click ‘sign up for an account’ then it takes you to the page where you can apply
by clicking on ’apply online’.
• Once you fill the form and upload all the necessary documents, click on submit and the
account will be opened within 24 hours. An email will be sent to you to acknowledge the
opening of the new account and then you can start making money!
For further information on INVESTNOW, please contact:
Abiola Osinulu
08070695719
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CONTACT US
Jude ChiemekaChief Executive Officer
+234 1 280 8929 +234 802 699 2983 [email protected]
Chidinma ChukwuekeHead, Domestic Institutional Sales
+ 234 1 280 7460 + 234 806 694 5455 [email protected]
Abiola OsinuluTeam member Private Client SalesOfficer in charge of Invest Now
+ 234 807 069 5719 [email protected]
Ijeoma DaramolaHead, Private Client Sales
+234 1 280 8341 +234 809 990 5252 [email protected]
UBA House (12th Floor) MarinaLagos
+234 1 280 8919 www.ubacapitalgroup.com