Last updated on August 29th, 2023 at 12:34 pm
What are shares?
Shares are pieces of a company “ownership” an investor pays for which automatically elevates him to the status of a shareholder or stakeholder. Stocks are used in a more general term
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You may have heard about investing jargon like equities and stocks, they are used interchangeably with shares (which is the most popular among beginners).
Purchase of a company shares affords the investor a small percentage of everything that belongs to the company. It also gives the investor the right to take part in key decision-making that may influence the company depending on the category he belongs to.
For instance, when you purchase the shares of MTN Nigeria, Apple or Facebook or any other company, you’re buying a fractional part of the company.
Buying a share of a company comes with a lot of advantages, most especially in a booming economy.
You might want to ask: Why do investors have a preference for stocks in the USA? We’ll come to that in our questions and answer segment of this guide
Categories of Shares
- Ordinary shares
- Preference Shares
Ordinary shareholders have voting rights and bear the liability of the company in the event of a winding-up while Preferred stockholders usually don’t have voting rights but they receive dividend payments before common stockholders do, and have priority over common stockholders if the company goes bankrupt and its assets are liquidated.
Shares are available to investors in two major ways: 1) primary market and secondary market
In the meanwhile…
Why do companies sell shares?
Why do people buy equities?
Why do companies sell shares?
If a company, Sanctity PLC (not real name), makes NGN50billion as profit after tax, why would it want to sell part of the company shares and share part of its profit with investors?
Expansion is one of the motivating rationales for a company to announce a Public Offer (PO). It’s simple when a company wants to expand their business operations, expand product offerings, diversify or drastically reduce the percentage of their ownership of the company, they usually go through offerings of stocks to the public.
That’s exactly what Bua Foods and MTN Nigeria recently did. For MTNN, it announced a public offering of 575 million shares at NGN169.00 each in late 2021.
Why do people buy stocks?
Buying shares isn’t a get-rich investment. It isn’t a Ponzi scheme. Rather, shares provide attractive long term returns.
Recently, hundreds of people in Nigeria and around the world are embracing stocks investment because of the current market scenario and the low interest rates in the Fixed Income space. They mostly do this so as to stay ahead of inflation and for better returns.
Investing in shares as earlier noted comes with lots of advantages. It also has some downsides if it isn’t done right.
And there are also precautions you need to take before putting your hear-earned money into buying stocks of a company, let’s explore them one after the other
Benefits of Investing in Stocks
Most investors want the safest way to grow their wealth while they focus on other pressing needs, below are some of the advantages of taking such steps:
Capital Gain
Supply and demand is the major driving force behind the price of stocks. When the price of stocks rises and you sell, you make a profit.
For instance, if you bought Facebook stocks at $206 per unit and the value of each unit rises to $210 six months after and you decided to sell, that’s a margin of $4/share. Imagine you bought 5000unit of such? That’s simply a capital gain.
Simplicity of Diversification
Investing in stocks allows you to diversify your investment. You’ve heard people say, “Don’t put all your eggs in one basket?” Purchasing shares in Company A and Company B means that your total investment will not go down if one company fails.
Even as you do this, it’s important to research a company before investing in them, digging into its track of dividend payment and gains should not be taken for granted.
Access to Useful Information
Unlike Ponzi (e.g inksnation) or any other shady investment that promises heavy and heart with no sufficient information, investing in equities gives you access to sufficient information on trading, gains, daily trading losses etc on the official website of stock exchanges around the world.
For instance, if you bought the MTN Nigeria shares in 2021, you can monitor the performance of the telecommunication company on the Nigerian Exchange every day.
This means you can personally monitor your investment in real-time anywhere, anytime. Information about equities is not hidden.
Right to Dividend
Gains on your stock investment are made through dividends or bonuses. This is made possible when a company shares its profit with its shareholders.
Easy Liquidity
Unlike selling a car or property which may take up to weeks or months before getting a buyer, it’s quite easy to find buyers for stocks on the stock exchange through registered and certified stock brokers.
For instance, if you want to liquidate your portfolio (sell all your stocks), it’s easy to find buyers through your broker.
Note: Stockbrokers may charge you for a service
Capital appreciation is one of the two main sources of investment returns, with the other being dividend or interest income.
Professional work for you
You don’t have to be a professional before buying stocks. There are trained professionals on the team of stock brokerage firms who make a living by providing the service to investors around the world.
As such, they will work for you. Also, the management team and board of directors of the company you invested in are there to maximise your wealth.
Availability of Buying options
Whether you are accessing the stocks through primary or secondary markets, you’re not bound to buy from a specific company.
For instance, if you run a check on the New York Stock Exchange, London Stock Exchange, National Association of Securities Dealers Automated Quotations (NASDAQ), or Nigerian Exchange, you will see a long list of listed issuers, all you need to do is to contact a certified broker on how to buy.
More Reliable
Unlike placing a bet on Chelsea VS Arsenal, which would go, either way, investing in stocks is more reliable. Although the value of stocks can also go down due to many factors, it’s still far better than gambling.
Room for learning
Investing in equities gives a beginner limitless privilege to learn even as they make their money work for them. Most of the stockbrokers have a blog category where they demystify the act of trading stocks.
Transparency
Activities of issuers of stocks or equities are regulated around the world. Sanctioned are sufficiently melted out on erring companies, unlike the “miracle” investment that promises 50% of return within 30-day.
No issuers can guarantee an investor what the dividend will be before the end of the business year. Dividends are paid based on the performance of the company.
It’s very easy to get the profit before tax and after of a trading company on the stock exchange and in the news.
Also, an investor can easily calculate their profit when a company they invested in declared a dividend.
Disadvantages of Investing in Stocks
It sounds so sweet to buy equities, right? The benefits do not come without some downsides, most especially if you failed to take your time to understand the working of the stock market and when to make a buying decision.
Some of them include:
High Volatility:
As earlier noted, there is no guarantee that a share will yield a high profit. Share prices can go up, it can nosedive due to many factors.
If an investment drops to the floor and fails to rise, you may lose a percentage of your investment. For instance, if you bought Century share at $50 per unit and some years after, the value drops and the price drops to $30 per unit, it means you’d lose $20 on each of the units of shares you bought.
Liquidation
Similar to the above point is the likelihood of a company liquidating. If that happens, you will lose your investment if you’re an ordinary shareholder.
Choosing the wrong stockbroker
Even as the Security and Exchange Commission (SEC) keeps an eye on the activities of certified stockbrokers, some stockbrokers are fraudulently “smart” in cheating their clients.
Since they’re abreast of the working and happenings in the stock exchange, dubious ones among them may collect your money when they know where the marketing is headed and instead of making the transactions in your name, they divert the money for their selfish gain.
Stocks Investment Tips
If you’re motivated to jump right in, here are some tips to help you
Choose stockbroker carefully
Before taking a dive into the stock market, ensure to know the working of the market. There are hundreds of free online courses on stocks you can take to know the basics. Choosing the right stockbroker will save you a lot of mistakes and fraudulent-related trade
Avoid panic sell
To succeed in stocks investment and trading, you must know that demand and supply plays a huge part.
Buy when the price is low, it’s called buy the dip in cryptocurrency trading and sell when the price is high when you’re a short-term investor. Avoid panic sell when the price is low.
Note: It’s not advisable to do a panic sale when the value of a share drops due to temporary factors. Always seek the advice of your investment advisor to make the right decision.
Research:
Watch the trends and performance of a company on the stock exchange. In Nigeria for instance, companies on the premium board of the Nigerian Exchange (NGX) do well while issuers under the consumers goods sector on the main board of NGX also do well.
There are some companies that may not do well, and you don’t want to waste your money by investing in them. Talk to an expert before making a buying decision.
Diversify your portfolio:
Have you got NGN2,000,000 to invest in stocks? Why not spread the money on two or three companies.
WHY?
It isn’t advisable to put your money in one company because of unforeseen circumstances. Do not put all your eggs in one basket.
Buy from trusted sources:
As we publish this guide, you are most likely to find advisers on stock online platforms where they advertise themselves to buy from them.
Please, ensure you go to the official website of SEC and NGX or LSE and other stock exchanges in any country you are interested in buying equities to see the list of accredited and certified stock brokers.
If there are some salient questions you think we’ve not covered above, below is a list of some stock-related questions and answers
Can I make money from the shares I bought?
Yes, if the value of the stocks increases, the value of stocks translate into a higher dividend for investors who own the stock.
Only a profitable company declares a high dividend for its investors, a turbulent company doesn’t. Besides, investing in equities is one of the most reliable ways to build your wealth over time.
Is it good to invest in shares?
Yes, it is good, but the benefits of such actions are hidden in a long-term investment, allowing your investment to grow.
Can I lose money in stocks?
You can lose money if there is a crash in prices and instead of waiting to understand the underlying factor that caused the crash, you dived into panic sell.
Don’t sell your positions when there is a crash, it could be temporary and nearly every issuer have experienced this one time or the other.
Is buying stocks the only way to get equity?
Stocks are not the only way, you can also get equity when you join a company or an organization. There are quality companies that offer stock options to their employees.
Do shareholders receive salaries?
If an employee buys shares of a company (employer), he will receive salary as an employee and receive dividends as an investor.
Recap:
Shares are a unit of ownership that an investor owns. The shares are technically referred to as “stocks” or “equities”.
Advantages of investing in stocks include: easy liquidity, transparency, buying options, the privilege to delegate professionals to work for you, and options to diversify
