Making Money from Shares – Part 1: Introduction

I decided to write this series in response to questions I received from friends. It will be a long series broken down into several parts to make it easier to read. The series will be devoted to how to invest in shares quoted on the Nigerian Stock Exchange.

Part 1: Introduction

What is Investing?

Investing is the purchase of a financial product such as shares and fixed income securities (Time Deposit, Treasury Bills, Commercial Paper etc.) or an item of value such as property with the expectation of gain in the future. In simple terms, investing is using money with the hope of making more money in the future. Investing whether in stocks, fixed income securities or property involves some element of risk as you may not get back all your money when the investment matures as with fixed income securities or when you decide to sell your shares or property.

People invest for all sorts of reasons, the main one being to save for retirement. Some invest to fund their children’s education and some for the freedom of having their money work for them. Whatever your reason, my advice is you start investing as soon as you have a full time job. This is because with compounding, time is your friend. In addition, when you start early, chances are you will start with a modest sum, which will allow you to learn and make mistakes when your account is still small rather than when millions are at stake.

It pays to keep in mind that investing in the stock market is a marathon with occasional burst of speed, therefore patience and endurance are keys to success.

Getting Started

Investing in shares of a company confers on you part ownership of the company proportionate to the number of shares you own compared to the total number of shares outstanding of the company. For example if you own 1 million shares of company XYZ and the company has 100 million shares outstanding, it means you own 1% of the company. You will also be entitled to receive any dividend declared by XYZ in proportion to the number of shares you hold.

You can invest in shares of companies that are privately held or in shares of companies that are publicly held and are quoted on a stock Exchange. This series is concerned with investing in shares of publicly quoted companies.

Stock Exchanges are where companies (through shares, bonds etc.) and governments (through bonds) can raise long-term capital and investors can buy and sell these securities. In Nigeria, the only Exchange for investing in shares is the Nigerian Stock Exchange (NSE), which commenced operations in 1961 as Lagos Stock Exchange.

Why invest in shares listed on the NSE? The main reasons that come to mind are:

• The market is not very deep with only about 120 actively traded stocks out of 190 listed at the end of 2012, which makes it easy for the beginner to research. Compare that with the US market, which has thousands of actively traded stocks. Among this 120 only about 40 are worthy of your money for one reason or the other which will become clearer as the series progresses.

• The market is young and inefficient, therefore higher potential for making money. For example, the average annual return in the last 20 years (ending December 2012) was 24%. Although in the last few years, foreign investors have become more active in the market and the average annual rate of return in the last decade has dropped to 15.6%.

• The Nigerian economy is growing with a young and growing population that portends well for future returns especially for long-term investors.

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