The reality is that investing in the stock market carries risk no doubt about that, just as anything else, but when approached in a disciplined manner, it is one of the most efficient ways to build up one’s net worth and future plan. While the value or amount in one’s bank account typically accounts for most of the net worth of the average Nigerian, most of the affluent and very rich people such as Mike Adenuga, Florunsho Alakija, Abdul Samad Rabiu etc, generally have the majority of their wealth invested in stocks.
ALSO CHECK OUT: How to Invest In the Financial Market
In order to understand the mechanics of the stock market, let’s begin by delving into the definition of a stock and its different types.
Definition of the word Stock (Share)
A stock or share is a financial instrument that represents ownership in a company or corporation and represents a proportionate claim on its assets (what the company owns) and earnings (what the company generates as profits).
NOTE: that stock and shares are sometimes interchange but shares are the unit of the stock a company issue to the public.
Stock ownership implies that the shareholder (the person who buys the share) owns a slice of the company equal to the number of shares the company issues out to the public.
For instance, a Nigerian that owns 100,000 shares in a company called Emeka and sons that issues out 1 million shares to the public, would have a 10% ownership stake in the company Emeka and sons. Most companies in the Nigerian Stock Exchange have public issued shares that run into the millions or billions.
Types of Stocks
There are generally two types of stock, companies’ issues and they are:
- Common Stock (shares)
- Preferred Stock (shares)
The main distinction between the two is that common shares usually carry a voting rights that enable the shareholder to have a say in corporate meetings (like the Annual General Meeting or AGM) – where matters such as election to the board of directors or appointment of auditors are voted upon
On the other hand, preferred shares generally do not have voting rights. Preferred shares are so named because they have preference over the common shares in a company to receive dividends (part of the companies’ profit) as well as assets (things the company owns) in the event of a liquidation (when the company run out of cash).
Common stock can be further classified in terms of their voting rights. Some companies have dual or multiple classes of stock with different voting rights attached to each class. In such a dual-class structure, Class A shares, for example, may have 10 votes per share, while the Class B “subordinate voting” shares may only have one vote per share. Dual or multiple-class share structures are designed to enable the founders of a company to control its fortunes and strategic direction.
Why a Company Issues Shares
In order for a business to become such a giant in the cooperate word, it however, requires access to a massive amount of capital.
That is to say for a business to pass through the transition of an idea germinating in an entrepreneur’s brain to an operating company, he or she needs to lease an office or factory, hire employees, buy equipment and raw materials, and put in place a sales and distribution network, among other things. These resources require significant amounts of capital -depending on the scale and scope of the business start up.
A business start-up can raise capital either by selling shares or borrowing money. Borrowing money can be a problem for a business start-up, because it may have few assets to pledge for a loan – especially in sectors such as technology or biotechnology, where a firm has few tangible assets – plus the interest on the loan would impose a financial burden in the early days, when the company may have no revenues or earnings.
Issuing stocks or shares, therefore, is the preferred route for most business start-ups that need capital. The entrepreneur may initially source funds from personal savings, as well as friends and family, to get the business off the ground. As the business expands and capital requirements become more substantial, the entrepreneur may turn to angel investors and venture capital firms.
When a company establishes itself, it may need access to much larger amounts of capital than it can get from ongoing operations or a traditional bank loan. It can do so by selling shares to the public through an initial public offering (IPO). This changes the status of the company from a private firm whose shares are held by a few shareholders to a publicly traded company whose shares will be held by numerous members of the general public. The IPO also offers early investors in the company an opportunity to cash out part of their stake, often reaping very handsome rewards in the process.
Once the company’s shares are listed on a stock exchange and trading in it commences, the price of these shares will fluctuate as investors and traders assess and reassess their intrinsic value. There are many different ratios and metrics that can be used to value stocks, of which the single-most popular measure is probably the Price/Earnings (or PE) ratio. The stock analysis also tends to fall into one of two camps – fundamental analysis, or technical analysis.
How the Nigerian Stock Exchange Works?
The Nigerian Stock Exchange (NSE) is where each cooperate and entity list their stocks and various individuals and even businesses can still buy those shares.
The NYSE and Nasdaq are the two largest exchanges in the world, based on the total market capitalization of all the companies listed on the exchange.