Posted by By OMODELE ADIGUN on
The history of the stock market, though controversial , was traced back to 1644, in the then New World, when the inhabitants of Manhattan built a wall across Manhattan Island to keep the invading British at bay.That wall gave rise to the name ‘Wall Street' in the New York City, where the New York Stock Exchange sprang up in 1863.
The history of the stock market, though controversial , was traced back to 1644, in the then New World, when the inhabitants of Manhattan built a wall across Manhattan Island to keep the invading British at bay.That wall gave rise to the name ‘Wall Street' in the New York City, where the New York Stock Exchange sprang up in 1863.
Over the years, the existence of a stock market or otherwise in a nation has become a key indicator of its level of economic development and sophistication.Today, there are about 25 stock exchanges in Africa, the first being the Johannesburg Stock Exchange (JSE) which was founded in 1887.
In Nigeria, stock business started in 1961 following the establishment of Lagos Stock Exchange, which later, in December 1977, metamorphosed into what is known as the Nigerian Stock Exchange today.The Exchange commenced business with only 19 securities that traded on its floors on that fateful day; June 5, 1961. For the uninformed, the stock exchange, also known as the capital market, is a platform where you can buy and sell shares, stocks , bonds debentures and other capital market instruments.It could be a trading floor or through an electronic device.
A share is what one has in order to become a member of a company. You can buy a share either from a public offer, also known as primary market or from the trading floor of the Exchange.That is the secondary market. Buying or selling a share is normally done through a stockbroker.
A stockbroker is a dealing member of the Stock Exchange who provides services to anyone who wants to buy or sell a share.
When you buy a share of a company you become a member (a shareholder) of that company. Being a member or a shareholder means that you share in the profit of the company.
Companies issue shares. These shares represent the money which shareholders( as members of the company) put down when they first invested in the company.
Owners of shares ( shareholders) are presumed to own the company.If the company makes a profit, the shareholders have the right to a share of the profit which is declared for distribution. We call such a slice of the profit a dividend. A dividend is not fixed amount.
People invest in shares for various reasons. It may be for dividends, bonus shares or capital appreciation .Whatever may be the investment objective, most investors have their eyes on how to maximize the returns on their investment.
However, the growing pile of unclaimed dividend, currently put at N7.2 billion by the Securities and Exchange Commission (SEC), the apex regulator of the capital market, can only point to one direction: That vast majority of investors are ignorant of how to play the market. Or how else can one explain the framing of share certificates by some investors who think that the documents are meant to be hung up high on the wall as decorations fit for the parlours? Telling that group of investors that they are sitting on a goldmine would amount to a fairy tale. Others just invest and keep their certificates anywhere, anyhow; inside the cupboard, under the pillow, under the mattress, inside the bag, just anywhere, anyhow! Some do not even know where they kept theirs.
The former attitude was what was adopted by the father of a top executive officer of a bank over two decades ago. By the time his son knew about stock business, he rushed home and came back to Lagos with two loads of kingsize Ghana-Must-Go bags. When his father was investing in stock market then, most of the blue chip equities now could be passed for penny stocks. For instance, as of March, 1987, Union Bank that is worth more than N39 today was going for N2.98 per share. UBA, Total, Mobil and CAP were being traded at N2.29, N1.66, N1.46 and N1.76 respectively. As of last week, their respetive share prices stood at N47.99, N180.05, N182.98 and N59.19.
What else do we say? Should we say that father and son can now enjoy their paradise while on earth as a result of the father's foresight? Do we need to preach to such group of people that the stock market is an engine of prosperity? Only God knows how much returns the old man would have made since then if he had been adequately informed that he needed to actively trade on these shares. Timely, accurate and durable information, they say, is the driver of the stock market.
To further prove that the capital market is really performing its role as wealth re-distributor, a journalist recently reaped a windfall of N22 million from a single transaction. How? He took a loan of N11 million from a bank and invested it on an upward mobile stock at N11 per share. Under two months, the price flew to N35. But our man had to quickly dispose of his shares when it hit N33 per share, reaping N33 million from the business. After paying his debt, he smiled to his bank with N22 million as gain made without stress. Just under two months!
To a potential investor and old investors alike, the question that should be agitating their minds now is how do I play this market in order to maximize the returns on my investment? 'It is by regular interface with the registrars," says Mr Walter Ogogo, the registrar, Institute of Capital Market Registrars.
According to him, the Nigerian Stock Exchange provides for the buying and selling of stocks, while on the other hand, the registrars validate and facilitate all transactions that go through the floor of the Exchange.
He explains: 'The Registrars make possible the millions of Naira that change hands in thousands of deals on the Stock Exchange everyday."
Transfer of shares
This has to do with the buying and selling of shares on the floor of the Exchange. Within four working days or T+3, the buyer's account in the register of members is expected to have been credited while the seller is expected to have been paid for the value of shares so sold. Shares purchased are kept electronically by Central Securities Clearing System (CSCS). However, shareholders who insist on having share certificates can be given certificates.
Transmission of shares
This has to do with change in the ownership of shares where the original owner of the share involved is deceased. The name of the original shareholder who is dead will be replaced by the names of the administrators who can retain the shares in their names or even sell them. The entire process looks simple but can take an average of three to six months.
The role of registrars
The transfer forms and relative share certificates are sent to the registrars concerned for verification. The registrars will verify the signature of the transferors and the share certificates attached. The signature verification process sounds simple but everything depends on it. The signatures are compared with what the shareholders signed on the original documents, which may be an application form or a transfer form. As for the share certificates, the registrars will ensure that they have not been sold and that they rightfully belong to the shareholder.
Without this simple but crucial verification process, no shares can be traded on the floor of the Exchange. When the signature on transfer forms have problems, this process that is expected to last not more than 48 hours can take much longer. The reason is that the registrar will ask for either bankers' confirmation of the signature involved, the physical appearance of the shareholder or international passport or drivers' licence. The registrars must satisfy themselves of the genuineness of every transaction before signing them as verified. That way, registrars prevent unauthorizied sale of shares in the market.
After verification, the registrars lodge the verified items with the CSCS after which the stockbrokers can trade on the shares concerned. CSCS captures the transactions electronically and sends the items back to the registrar with a diskette with which the register of members will be updated by the registrar.
When a shareholder dies, the registrar will ask for the following documents and confirm their sources before registering the names of the administrators or executors: Death certificate, letter of administration if the deceased died without a Will, Probate Letter, if the shareholder died leaving behind a Will, bankers' confirmation of the signatures of the administrators/executors and the physical share certificates which will be endorsed after registration. By this process, the Registrars confirms the genuineness of the documents before registering the change of the shares."
To get maximum returns on investment, an investor needs to know when to buy, when to sell, what signs should one watch for and what factors affect price movements.
According to Mr Wole Abegunde, Managing Director of Great Africa Securities Ltd, a stockbroking firm, factors that affects upward price movement tend to initiate a bullish market generally. Bull trend means that the market is going up and is doing well as reflected in share prices, while bear trend means that the market is going down and is not doing well. 'The best time to sell is at the top and the best time to buy is at the bottom."
He explains: 'To get the maximum benefit from a bull market, a trader should have the courage to buy stocks when the economic and market picture look very bleak. A trader should invest when a bull market starts in order to generate huge gains.
'When the stock market undergoes a significant price decline, it generates a climate of fear. When a market botton is reached, extreme pessimism reigns. At that time, a bull market starts. As price gains are made, fear starts to recede. As further gains are made, caution sets in. However, as significant price appreciation takes place with the bull market continuing, investors tend to forget the pessimistic bear market days. At that time, investor's attitude can be described as confident and euphoric. By the time a top is reached, most investors remain convinced that the market will keep going up indefinitely. At that point, the bear market starts. As the market starts declining, the same emotions characterize the market but in the reverse direction - confidence, caution and fear. Finally, when the bottom is reached, the feeling is widespread that prices will continue to decline even further. At that time, the next bull market is ready to start."
But how can one recognize a bull market? 'A combination of several factors start a bull market. These include turn-around in the economy or recovery from recession, reduction in interest rates that eases credit and improves liquidity in the system, increase in inflation and performance of company. A market player should invest when a bull market starts in order to generate huge gains. However, it is important to sound a note of warning here; stocks should not be bought indiscriminately during the early stage of a bull market. A trader should analyse and identify the potential leaders because they are the first to rise."
He lists the bullish signs as follows: Decreasing interest rate, high inflation, excessive pessimism, market moving to new highs without widespread activity, high level of cash in circulation, few significant price decline and decreasing flow of new stock issues. New issues can adversely affect the market's supply/demand balance. The rest are presence of more buyers than sellers, accumulation taking place as indicated by high volume on up-days and low volume on down-days and lastly, net asset per share at below market price.
As for bear markets, Abegunde has this to say: 'A bear market is every investor's nightmare. Many bear markets begin when the economy and markets are steaming ahead and catch investors by surprise. When it does arrive, a bear market creates panic and pessimism. However, for those who are able to forecast the onset of a bear market and lighten stock investments in time, it presents a great opportunity."
Recognising Bearish signs
'There are many signs of a bear market. However, many investors ignore them. These signs typically are at market top when there is a tendency to ignore bad news and warning signs. Traders or investors start believing that the market will continue to go up and up and suddenly there is a crash. It is important that traders recognize bear market signals and remain prepared for it. This is not too difficult as bear markets do not arrive overnight. When bearish signs are identified, it is recommended that a trader takes action by reducing exposure to stocks."
These are some of the signs of a bear market: 'Similarities with stock market crashes of 1996/97; increasing interest rate plus economic recession; market rising when interest rates are rising; reports of corporate earnings fall below expectations; over-valued price earnings: This means that market rises too much from normal valuation levels; excessive enthusiasm and euphoria, especially by professionals which typically occur near the end of a bullish market and the start of a bear market; when low quality and cheap stocks start to appreciate in price. Other signs are excessive speculation, increased trading volume; investors seeking shelter in blue chips; distribution as indicated by high volume on down-days and low volume on up-days as well as rallies failing on lighter volume.
A trader or investor should learn to recognize market tops and market bottoms, which can lead to making more profitable decisions either at the top or at the bottom by delaying buying to a more favourable time or by selling before investors start dumping en masse.The best time to sell is at the top and the best time to buy is at the bottom."
Market top signs
'High valuation level, dividend yield falling below five per cent; widespread bullishness; belief that present scenario is different and history will not repeat itself this time; trumpeting enormous gains to be made in the stock market by proffesionals and the media; rising interest rate and when stocks no longer react positively to strong earnings. Other signs are when traded volume expands significantly; excessive speculation among low priced stocks; breakdown or weakening of a large number of blue chip stocks and when the market is unable to move higher despite increasing volume."
Market bottom signs
'When the market declines in a bear market, a market player should be able to recognize the bottom. This is the level where all sellers have dumped their shares. It is at this level that the market stabilizes and starts its rebound. This is the most profitable phase of the market and it pays to recognize it. The bottom signs include the following: Intense selling on heavy volume; successive low price on decreasing volume and increase in market price with increasing volume on successive days of the rally. The rest are extreme pessimism, which manifests in very high bearish number of stocks and low bullish numbers, under-valuation of stock and improving earning/dividend yield."
Market seasons
Another question often asked by investors who are very keen on making maximum returns on their investments has to do with the market seasons. Like every other market, the stock market also has its own seasons. This was explained by the seasoned stockbroker:
'A number of seasonal factors have a bearing on the behaviour of the stock market. For example, it is known that prices fall in December because of Christmas. A market player should know these seasons in order to take appropriate vantage position. Some of these seasons are peculiar to each market and related to local occurences. However, the Nigerian stock market reacts to several developments and timings as follows:
January upfront allowances payments
It is estimated that over N1 billion is paid as upfront and housing allowances to staff by banks, parastatals and multinatinational companies. The bulk of this amount is invested in stocks and the resulting pressure on the stock market induces price appreciation.
Month end
End of months are usually characterized by price fall. This has been attributed to margin traders. Margin traders are those investors who borrow more money than they have either from a bank or any other lender to speculate in securities. Banks usually put pressure on the margin traders that have overtraded and exceeded overdraft limit during the month to make their account good and cover up before last day of the month when returns would be made. This people will flood the market with stocks which will invariably force down prices.
Quarter end
End of regular quarters usually witnesses price increases especially of blue chip companies due to window dressing by portfolio managers. Fund managers file their reports and render statements of valuation at the end of every quarter. To look good, fund managers sell their poorly performing stocks and dress up their portfolio with blue chip stocks and dilute cost on earlier high price purchases.
December (Christmas)
It is characteristic of share prices to fall in December because of the desire of investors to realize money to fund the expenses of the Yuletide season. This increases supply of stocks in the market and consequently prices crash.
Bank's financial year end
Financial year for most banks end between March and June. In order to improve their liquidity ratio requirement, banks recall facilities earlier granted and this results in dumping of stocks.
Specific stock behaviour
Stock price does not rise in an uninterrupted manner when it is in an upward trend. It will soon hit some imaginary resistance line, it turns and then starts falling until it hits the level of support. These imaginary points of resistance and support are referred to as pivot points. Pivot points are those price levels that are specified by traders as limits.
Stock prices exhibit a particular trend before and after benefit payment. When benefits are to be declared, the rumour is usually in the market long before it is officially declared. This rumour occurs at two levels before the result is officially declared. At the first level, proactive traders, fundamental analysts and inner caucus of the company will have an indication of the benefit to be declared.
At this point, the stock price will rise steeply and stagnate until the second stage. At the second stage, more analysts, investors and a wider range of insiders will have knowledge of the benefit. At this point, market hearsay is prominent and stock price experiences the second significant rise and stagnate or rises gradually until the benefit is officially declared. Upon the declaration of the benefit, the majority of the market starts to buy and the final flight of price is experienced. This will last until the day of closure of register when the share price is adjusted or marked down for the benefit.
After the adjustment, share price rises slightly for a short period as a result of perceived undervaluation of the stock. However, as soon as bonus certificates are released, investors want to take profit by selling the bonus and this increases the supply of the shares and induce a price fall to a level below the adjusted price.
It is advisable for a trader to sell before the closure of register. A trader should not wait for bonus and dividend because his working capital will be trapped in the dividend and or bonus.
Post-offer behaviour
Stocks generally exhibit price rise or decline after the offer. The direction depends largely on the offer price for IPO (Initial Public Offering) and offer price vis-à-vis secondary market price for quoted stocks. IPOs have reputation of price increase after listing of the offer.
Offer for subscription - price movement after the listing of the supplementary shares depends on the level of success of the offer and market trend during the period of technical suspension.
Rights offer - price movement depends largely on the discount at which the rights are offered, that is, the difference between the quoted price and the offer price and also the market trend during the period of technical suspension.
The biggest problem that sometimes rob investors of good returns is lack of proper monitoring of their investments. As a result, cases of sales of shares without instruction by stockbrokers are common occurrence in the market.
Addressing the problem, Mr Kennedy Aigbekaen of SEC stated that the commission is getting round the problem by removing fringe players through recapitalization and introduction of market makers.
He explains: 'In a large market like Nigeria's, definitely, we have fringe players. They do not have capitalization as their peers; they do not have securities if there is a request by their clients. The issue of capitalization is one of the ways SEC is approaching the issue. It wants to remove fringe players from the market. The stock-brokerage firms have to be well capitalized to operate in the market.
'Again, we are in the process of finalizing the introduction of market makers. In market making, we have a dealer whose job is to stabilize the market. Meaning that he buys securities under obligation to make sure that if there is a shortfall, he provides the securities in the market. If there is an overflow, he mops up. The committee on market making has just completed its work, it has submitted its input to the management.
'As soon as a decision is taken, they will come on board.
They are to operate as a dealers. In that case, brokers who have instruction from their clients to buy securities on behalf of their clients can go to the market to do what they call securities blending. They borrow from the market makers and sell to their clients. With that, this issue of brokers selling without instruction will be reduced.
'The other solution is through trade alert. Today, many shareholders have subscribed to it. If your shares are being sold by your brokers, the system generates a text message and sends it to your phone. So it is one way to check the problem.
The other way is through the issue of custodian. One, you have to dematerialize your share certificates so that they exist only as electronic records in the central securities depository of the CSCS. If they are in the CSCS, it means there is a custodian. When you have total dematerialization, if you buy stocks, they are credited to your account of the CSCS. If you instruct the brokers to trade your securities or stocks, it contacts the custodian. What it means is that the brokers will not have any direct play with the securities of anybody any longer."
From all these, one thing is certain: If Nigerian investors keep to them, blessed are they, for they shall truly reap handsome returns on their investments.