SAVINGS
This is an age long principle of building wealth. Anyone who is desirous of achieving financial independence must not treat it with levity. The book of proverbs has this to say about savings. A wise man saves what he would need but a fool spends it all." You need money to buy shares, so save! Experts recommend that 10% of what you earn should be saved. I have said earlier on that you do not have to have hundreds of thousands before you start investing in shares you can get started with as little as five thousand naira (5,000). Stop keeping your money in a savings account, where the rate of return is poor, except it is for a target. Please don’t tell Tony Elumelu and Jim Ovia that I told you. Be wise!
SOFT LOAN AT WORKPLACE
It is quite unfortunate that most people who take salary advance and loans at their workplace only use it to acquire liabilities, like a car, or to meet an urgent need. You can however, decide to take advantage of the salary advance or the I owe you (IOU) at your workplace to invest in the capital market, when prices are down, so as to take advantage of capital appreciation. You must however, have a good knowledge of the capital market before you invest in shares.
Your could also use loans from cooperative to buy shares instead of using it to acquire liabilities.
SHARE PURCHASE SCHEMES/TRADING FACILITY
Some banks now have special facilities for those who want to invest in shares. This is usually backed by a collateral. Some stock broking firms also give some of their reliable clients credit to purchase shares on which a little interest in charged. Contact your broker or your bank for more information on this.
SALES OF ASSET
This is strictly for matured investors. A wise investor can also sell some of his idle assets such as abandoned cars and some other depreciating assets. The proceeds can then be invested in shares. This is because sometimes people keep depreciating assets that they do not have plans for unprofitable assets can also be disposed of.
LOAN FROM COMMERCIAL BANKS
This is strictly for matured and sophisticated investors who are skilled in the art of speculation. This is because loans from banks attract interest rate. There are so many people that are already doing it. but you have to be very smart so as to beat the interest rate and still make some gains for yourself. This could be done successfully during bearish period when people are selling their shares and prices are falling rapidly. An investor would just take position and wait for the bearish period to be over. An investor can also take advantage of this facility when prices of some stocks are unnecessarily low. The investor must however be sure that the fundamentals are right, before he commits his money. For instance, if you had borrowed a loan of N18million to purchase 1 million units of Dangote sugar refinery during the offer for sale in December 2006. Your investment is worth N38million as at May 22nd, 2007, assuming the interest rate is 30%, you will still have 70% to yourself.
This strategy is called making money from other peoples’ money (OPM)
Be Wise!
Saturday, July 28, 2007
Wednesday, July 18, 2007
PROFITING FROM STOCK TRADING
PROFITING FROM STOCK TRADING
"To buy stocks and keep is folly" - Chief Akintunde Asalu, Chairman, Nigeria Shareholders’ Solidarity Association. (NSSA)
The key to profiting from stock trading is to know when to buy and when to sell. This is because the timing of investment is a very important decision.
An investor who wants to profit optimally from stock trading must be one who is knowledgeable and current. This is because the stock market thrives on information. Therefore, anybody who wants to trade in stock successfully must keep abreast of happenings in the business world. One way to do this is to read business books and financial magazines to know the latest happenings around. You would soon learn why I said so, because policy shifts and decision in the business world affect the market. The ability of an investors to correctly interpret some of these happenings will determine the extent to which he will profit from the capital market. An investor who wants to profit optimally from his investments would also do well by attending financial seminars organized by active investors.
You would recall from the previous edition that prices are determined through the interplay of demand and supply forces (Market Forces). There are however, some factors which lead to a change in price of stocks and equities. I call them drivers of stock prices. They are explained below:
Drivers of Stock Prices
- Government Policies
- Interest rate and monetary policies
- Company news
- Politics
- Price of other Stocks
GOVERNMENT POLICES
A change in government policy in favour of a particular sector of the economy will lead to the increase in the price of stocks in that sector, all other things being equal. The change in government policy could be a ban on importation of the product the company is producing. It could also be a change in policy For instance, the pension reform has led to the injection of more funds into the capital market. This has led to an increase in the price of most equities. An unfavourable government policy will have the opposite effect on the prices of those companies. This is because a change in government policy will affect the bottom line of the company.
INTEREST RATE AND MONETARY POLICIES
A change in interest can also affect the price of equities. This is because money flow to where it can get the highest returns. Investors will put their money where they can get the highest rate of return. A reduction in interest rate from 5% to 2% will reduce the number of people who invest in money market instruments which attracts a lower interest rate. This people would go to the capital market in search of higher returns. This will have a positive or negative effect on prices of listed equities, depending on whether the change in interest rate is positive or negative.
COMPANY NEWS
Information about a company also affects the price of the company shares. The information could either be positive or negative. If the information about the company is positive the price of the company has no other place to go than up. If the information is negative and will affect the future of the company, then the price of the stock will come down. For instance, the discovery of overstatement of account by Cadbury Plc led to a price depreciation from over N60 to less than N40. The following are positive news that will likely lead to an increase in the price of a stock.
(a) Increase in the turnover of the company: An increase in the turnover of a company indicates that the company has been able to generate more business. An investor must however, be sure that the increase is not as a result of inflation.
(b) Increase in the profit after tax of a company: This will most likely result in an increase in the dividends payable to shareholders.
(c) Cost reduction efforts on the part of the company: A change in the processes of an organization from labour intensive to capital intensive is a positive signal that the financial of the company will improve in the future.
(d) Innovations and Inventions: A company that keeps on innovating and bringing out new products could be heading for the top. A company that advertises frequently should also be watched closely because the company might be planning something.
(e) Dividend and Bonus: An expectation of increase in dividend or declaration of bonus by a company will all other things being equal lead to an increase in price.
POLITICS, WAR AND DISASTERS IN NA INDUSTRY
A disaster or crises in a particular sector will lead to a reduction in the prices of stocks of that sector. For instance, price of Agricultural companies during outbreak of diseases such as bird flu.
PRICE OF OTHER STOCKS
The price of other stocks of the same sector could also determine the direction of the price of a company. If the price of WAPCO Cement is increasing rapidly, the price of will likely follow suit, if they have similar fundamentals.
Now that we have discussed the drivers of equity price or what determines the price of stocks, I will now recommend when to buy and when to sell. Let me however, point a caveat that sometimes these advice might not work like you want but make sure the fundamentals of the stocks you choose are right, so that even if the outcome is not what you expect, you will still have a safe landing.
Enjoy your Reading:
WHEN TO BUY
- When government policy will favour a particular industry.
- Favourable company news.
- When a company is gearing up for the market
- After a public offer.
- Before the end of a financial year.
- After the end of a financial year.
- When the prices of stocks in the same industry are appreciating rapidly
- Bearish Period.
FAVOURABLE GOVERNMENT POLICY
A company that operates in an industry that is going to benefit from a favourable government policy is a good stock to pick. This is because the change in government policy will reflect in the bottom line of the company. Although the increase in the bottom line might not be immediate, it will not doubt reflect in no distant future. For instance, a ban on the importation of essential commodities like cement, sugar and other consumer goods will stimulate local demand, with the local industries manufacturing the commodities being the ultimate beneficiary.
The way to profit from this is to analyse any change in government policy and the likely benefiaries, then choose the stock of the companies that will benefit from it. for instance, the recent ban on individual printing of cheques led to an increase in the price of the shares of one of the companies that won the contract to produce the cheques for all the twenty-five banks. The company in question is Tripple Gee. The company shares were trading for less than N1 before the new Central Bank policy and rose to N7. An investor who bought at N1 made a capital appreciation of 600%
FAVOURABLE COMPANY NEWS
This will have a positive effect on the price of the company. Such news includes, increases in turnover, increases in profit after tax, restructing, acquisition prospects or merger, introduction of new products, a proactive new management etc. It is also not all bad news that will affect the company adversely. Some could be for a short period. If it is for a short period, it could be your opportunity to buy the stock at a discount.
WHEN A COMPANY IS GEARING UP FOR THE PRIMARY MARKET
One of the best periods to buy stock of a company is when the company is preparing to hit the market for fresh funds. This is because the company in question will be releasing all the positive information that could drive the price of the stock up. Some company boards also manipulate the price of their shares so that they will be able to raise a lot of funds with few numbers of shares.
To benefits from this, an investor should act promptly whenever he hears that a company wants to raise funds. The investor should however, not ignore the stock picking tips that I have discussed before. He must make sure the fundamentals of the company are alright before he invests in the company. One of the reasons why it is advisable to buy stocks of companies that are in the market to raise funds is that the company’s level of performance, in terms of turnover, profit etc will not remain the same after the injection of more funds. For instance, First bank Plc is expected to net about N20billion naira after tax profit at the end of this financial year. The company is also in the market to raise N100 billion. A wise investor will know that the bank’s profit can never remain at the same level again, because if the bank could make N20billion profit with a share holders fund of N60billion then the profit after tax of the company after the public offer should be in the region of 40-50billion naira.
AFTER A PUBLIC OFFER/RIGHTS ISSUE
An investor, who misses the opportunity to invest before or during a public offer, can do so immediately the stock is listed, so as to take advantage of capital appreciation. This is because, a good company share price will rise above the price at which it was sold and will likely remain above the offer price. If you are not able to buy immediately, you can buy when you notice that the price has started coming down, especially when people have started receiving their share certificates. This is because some new investors will want to take profit by selling their shares, if they notice that the price is abnormally high. If this persists, the price of the company will come down and it might be the appropriate time to buy.
BEFORE THE END OF THE FINANCIAL YEAR
This is very advisable especially when the company is expected to give bonus or an increased dividend. This is because most blue chip companies are predictable, some give bonus issues regularly and some give every two years. If you notice that a company is likely to do a bonus in the current year, it is not a bad idea to position for it.
AFTER THE END OF THE FINANCIAL YEAR
One of the best periods of buying shares could be at the end of the financial year, especially after the closure of register. This is because it will take another full year before investors in the companies get any goodies from the company, except for companies that pay quarterly or half year dividend, such as Dangote sugar refinery and Guaranty Trust Bank. This is because the price of the company will likely come down, because some investors will want to move their investments to other companies that have not closed their registers. However, the price of the stock might not come down after the end of the financial year, it might indeed increase rapidly, especially if the 1st quarter results of the company shows significant improvements in earnings. Whichever way, this is one of the best periods to buy.
WHEN THE PRICES OF STOCKS IN THE SAME INDUSTRY ARE APPRECIATING RAPIDLY
A surge in the prices of stocks in the same industry will later spread to the other stocks in the sector that have not "Caught the Fire." This is because these companies would be considered cheap, especially if the other stocks have reached their peak. You must however, do your research to ensure that everything is alright with the company before you invest in it. This is because the price could be a reflection of happenings in the company.
BEARISH PERIOD
A bearish period is a period when the prices of stocks are coming down.
This is how to benefit from it. if the fundamentals of the company is good, you can enter the market in batches. I did it in 2004 and I am always happy whenever I check the price of the stocks I bought then. Their prices have appreciated tremendously, some by 500%. Do not forget the rule here: Check the fundamentals.
WHEN TO SELL
‘To buy shares and keep is folly’
I agree with Chief Akintunde Asalu that to buy shares and keep is folly. One of the reasons why you must not do this is because sometimes the price of a stock appreciates to a level that its fundamentals cannot support, and if this happens, the price has no other place to go than down. A wise investor will sell when he feels the stock has risen to that level. A smart investor will not be greedy; he will sell when he thinks he has achieved his price target. This is because greed might make you think that the price of the company will be going up and instead of exiting the stock, when you have reaped some modest appreciation, you keep on thinking it will continue to go up. Before you know it, the party might be over. If you reap all the capital appreciation, what will others enjoy? Don’t be greedy.
I present below guides on when to sell some:
UNFAVOURABLE GOVERNMENT POLICY
An unfavourable government policy will affect the price of stock in the industry that is most likely to be at disadvantage. You should however, watch out for ways by which the management of the company is trying to solve the problem. If the management is helpless, it might be in your best interest to exit the stock, and move to a more profitable one before every body does.
UNFAVOURABLE COMPANY NEWS
This information should be analyzed very carefully, before you take your decision. This is because, the retrogression in profit or a decline in performance might be temporary. If you are sure it is temporary, don’t exit the stock. But if it is likely going to affect the future performance of the company, then exit the company.
AFTER THE END OF THE FINANCIAL YEAR
A significant improvement in the financials of a company will likely attract more investors. They will do this and the price will rise rapidly if dividend and bonus have been paid, and the price is still high, it might be the time to sell and move to another stock, or wait till the price comes down, so that you can increase your shareholding in the company.
BULLISH PERIOD
This is a time when prices of stocks are rising rapidly. It could be as a result of a change in government policy. For instance, substantial amounts of pension funds have been invested in the capital market. This has increased the level of activity in the capital market. You can sell when prices are rising rapidly especially when you know that the fundamentals of the stock cannot support such appreciation. It is however, advisable to take profit in batches, that is, you sell in parts, so that if the price appreciates more, you can sell the balance.
"To buy stocks and keep is folly" - Chief Akintunde Asalu, Chairman, Nigeria Shareholders’ Solidarity Association. (NSSA)
The key to profiting from stock trading is to know when to buy and when to sell. This is because the timing of investment is a very important decision.
An investor who wants to profit optimally from stock trading must be one who is knowledgeable and current. This is because the stock market thrives on information. Therefore, anybody who wants to trade in stock successfully must keep abreast of happenings in the business world. One way to do this is to read business books and financial magazines to know the latest happenings around. You would soon learn why I said so, because policy shifts and decision in the business world affect the market. The ability of an investors to correctly interpret some of these happenings will determine the extent to which he will profit from the capital market. An investor who wants to profit optimally from his investments would also do well by attending financial seminars organized by active investors.
You would recall from the previous edition that prices are determined through the interplay of demand and supply forces (Market Forces). There are however, some factors which lead to a change in price of stocks and equities. I call them drivers of stock prices. They are explained below:
Drivers of Stock Prices
- Government Policies
- Interest rate and monetary policies
- Company news
- Politics
- Price of other Stocks
GOVERNMENT POLICES
A change in government policy in favour of a particular sector of the economy will lead to the increase in the price of stocks in that sector, all other things being equal. The change in government policy could be a ban on importation of the product the company is producing. It could also be a change in policy For instance, the pension reform has led to the injection of more funds into the capital market. This has led to an increase in the price of most equities. An unfavourable government policy will have the opposite effect on the prices of those companies. This is because a change in government policy will affect the bottom line of the company.
INTEREST RATE AND MONETARY POLICIES
A change in interest can also affect the price of equities. This is because money flow to where it can get the highest returns. Investors will put their money where they can get the highest rate of return. A reduction in interest rate from 5% to 2% will reduce the number of people who invest in money market instruments which attracts a lower interest rate. This people would go to the capital market in search of higher returns. This will have a positive or negative effect on prices of listed equities, depending on whether the change in interest rate is positive or negative.
COMPANY NEWS
Information about a company also affects the price of the company shares. The information could either be positive or negative. If the information about the company is positive the price of the company has no other place to go than up. If the information is negative and will affect the future of the company, then the price of the stock will come down. For instance, the discovery of overstatement of account by Cadbury Plc led to a price depreciation from over N60 to less than N40. The following are positive news that will likely lead to an increase in the price of a stock.
(a) Increase in the turnover of the company: An increase in the turnover of a company indicates that the company has been able to generate more business. An investor must however, be sure that the increase is not as a result of inflation.
(b) Increase in the profit after tax of a company: This will most likely result in an increase in the dividends payable to shareholders.
(c) Cost reduction efforts on the part of the company: A change in the processes of an organization from labour intensive to capital intensive is a positive signal that the financial of the company will improve in the future.
(d) Innovations and Inventions: A company that keeps on innovating and bringing out new products could be heading for the top. A company that advertises frequently should also be watched closely because the company might be planning something.
(e) Dividend and Bonus: An expectation of increase in dividend or declaration of bonus by a company will all other things being equal lead to an increase in price.
POLITICS, WAR AND DISASTERS IN NA INDUSTRY
A disaster or crises in a particular sector will lead to a reduction in the prices of stocks of that sector. For instance, price of Agricultural companies during outbreak of diseases such as bird flu.
PRICE OF OTHER STOCKS
The price of other stocks of the same sector could also determine the direction of the price of a company. If the price of WAPCO Cement is increasing rapidly, the price of will likely follow suit, if they have similar fundamentals.
Now that we have discussed the drivers of equity price or what determines the price of stocks, I will now recommend when to buy and when to sell. Let me however, point a caveat that sometimes these advice might not work like you want but make sure the fundamentals of the stocks you choose are right, so that even if the outcome is not what you expect, you will still have a safe landing.
Enjoy your Reading:
WHEN TO BUY
- When government policy will favour a particular industry.
- Favourable company news.
- When a company is gearing up for the market
- After a public offer.
- Before the end of a financial year.
- After the end of a financial year.
- When the prices of stocks in the same industry are appreciating rapidly
- Bearish Period.
FAVOURABLE GOVERNMENT POLICY
A company that operates in an industry that is going to benefit from a favourable government policy is a good stock to pick. This is because the change in government policy will reflect in the bottom line of the company. Although the increase in the bottom line might not be immediate, it will not doubt reflect in no distant future. For instance, a ban on the importation of essential commodities like cement, sugar and other consumer goods will stimulate local demand, with the local industries manufacturing the commodities being the ultimate beneficiary.
The way to profit from this is to analyse any change in government policy and the likely benefiaries, then choose the stock of the companies that will benefit from it. for instance, the recent ban on individual printing of cheques led to an increase in the price of the shares of one of the companies that won the contract to produce the cheques for all the twenty-five banks. The company in question is Tripple Gee. The company shares were trading for less than N1 before the new Central Bank policy and rose to N7. An investor who bought at N1 made a capital appreciation of 600%
FAVOURABLE COMPANY NEWS
This will have a positive effect on the price of the company. Such news includes, increases in turnover, increases in profit after tax, restructing, acquisition prospects or merger, introduction of new products, a proactive new management etc. It is also not all bad news that will affect the company adversely. Some could be for a short period. If it is for a short period, it could be your opportunity to buy the stock at a discount.
WHEN A COMPANY IS GEARING UP FOR THE PRIMARY MARKET
One of the best periods to buy stock of a company is when the company is preparing to hit the market for fresh funds. This is because the company in question will be releasing all the positive information that could drive the price of the stock up. Some company boards also manipulate the price of their shares so that they will be able to raise a lot of funds with few numbers of shares.
To benefits from this, an investor should act promptly whenever he hears that a company wants to raise funds. The investor should however, not ignore the stock picking tips that I have discussed before. He must make sure the fundamentals of the company are alright before he invests in the company. One of the reasons why it is advisable to buy stocks of companies that are in the market to raise funds is that the company’s level of performance, in terms of turnover, profit etc will not remain the same after the injection of more funds. For instance, First bank Plc is expected to net about N20billion naira after tax profit at the end of this financial year. The company is also in the market to raise N100 billion. A wise investor will know that the bank’s profit can never remain at the same level again, because if the bank could make N20billion profit with a share holders fund of N60billion then the profit after tax of the company after the public offer should be in the region of 40-50billion naira.
AFTER A PUBLIC OFFER/RIGHTS ISSUE
An investor, who misses the opportunity to invest before or during a public offer, can do so immediately the stock is listed, so as to take advantage of capital appreciation. This is because, a good company share price will rise above the price at which it was sold and will likely remain above the offer price. If you are not able to buy immediately, you can buy when you notice that the price has started coming down, especially when people have started receiving their share certificates. This is because some new investors will want to take profit by selling their shares, if they notice that the price is abnormally high. If this persists, the price of the company will come down and it might be the appropriate time to buy.
BEFORE THE END OF THE FINANCIAL YEAR
This is very advisable especially when the company is expected to give bonus or an increased dividend. This is because most blue chip companies are predictable, some give bonus issues regularly and some give every two years. If you notice that a company is likely to do a bonus in the current year, it is not a bad idea to position for it.
AFTER THE END OF THE FINANCIAL YEAR
One of the best periods of buying shares could be at the end of the financial year, especially after the closure of register. This is because it will take another full year before investors in the companies get any goodies from the company, except for companies that pay quarterly or half year dividend, such as Dangote sugar refinery and Guaranty Trust Bank. This is because the price of the company will likely come down, because some investors will want to move their investments to other companies that have not closed their registers. However, the price of the stock might not come down after the end of the financial year, it might indeed increase rapidly, especially if the 1st quarter results of the company shows significant improvements in earnings. Whichever way, this is one of the best periods to buy.
WHEN THE PRICES OF STOCKS IN THE SAME INDUSTRY ARE APPRECIATING RAPIDLY
A surge in the prices of stocks in the same industry will later spread to the other stocks in the sector that have not "Caught the Fire." This is because these companies would be considered cheap, especially if the other stocks have reached their peak. You must however, do your research to ensure that everything is alright with the company before you invest in it. This is because the price could be a reflection of happenings in the company.
BEARISH PERIOD
A bearish period is a period when the prices of stocks are coming down.
This is how to benefit from it. if the fundamentals of the company is good, you can enter the market in batches. I did it in 2004 and I am always happy whenever I check the price of the stocks I bought then. Their prices have appreciated tremendously, some by 500%. Do not forget the rule here: Check the fundamentals.
WHEN TO SELL
‘To buy shares and keep is folly’
I agree with Chief Akintunde Asalu that to buy shares and keep is folly. One of the reasons why you must not do this is because sometimes the price of a stock appreciates to a level that its fundamentals cannot support, and if this happens, the price has no other place to go than down. A wise investor will sell when he feels the stock has risen to that level. A smart investor will not be greedy; he will sell when he thinks he has achieved his price target. This is because greed might make you think that the price of the company will be going up and instead of exiting the stock, when you have reaped some modest appreciation, you keep on thinking it will continue to go up. Before you know it, the party might be over. If you reap all the capital appreciation, what will others enjoy? Don’t be greedy.
I present below guides on when to sell some:
UNFAVOURABLE GOVERNMENT POLICY
An unfavourable government policy will affect the price of stock in the industry that is most likely to be at disadvantage. You should however, watch out for ways by which the management of the company is trying to solve the problem. If the management is helpless, it might be in your best interest to exit the stock, and move to a more profitable one before every body does.
UNFAVOURABLE COMPANY NEWS
This information should be analyzed very carefully, before you take your decision. This is because, the retrogression in profit or a decline in performance might be temporary. If you are sure it is temporary, don’t exit the stock. But if it is likely going to affect the future performance of the company, then exit the company.
AFTER THE END OF THE FINANCIAL YEAR
A significant improvement in the financials of a company will likely attract more investors. They will do this and the price will rise rapidly if dividend and bonus have been paid, and the price is still high, it might be the time to sell and move to another stock, or wait till the price comes down, so that you can increase your shareholding in the company.
BULLISH PERIOD
This is a time when prices of stocks are rising rapidly. It could be as a result of a change in government policy. For instance, substantial amounts of pension funds have been invested in the capital market. This has increased the level of activity in the capital market. You can sell when prices are rising rapidly especially when you know that the fundamentals of the stock cannot support such appreciation. It is however, advisable to take profit in batches, that is, you sell in parts, so that if the price appreciates more, you can sell the balance.
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