investing in stock:

UBA Securities limited

INVESTING IN STOCK:

TIPS FOR THE MOTIVATED INVESTOR



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.


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.


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.


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.


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.


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


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


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 .



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.



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.



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.

• .



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.


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.



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.



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.



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.




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;


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.



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.



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.



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.




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.


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.



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.



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.



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.



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.



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.


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’.


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

[email protected]

08070695719


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

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