Investing in the Nigerian Capital Market – What You Should Know
What is a capital market?
Capital market is a market for trading medium to long-term financial instruments such as shares and bonds with a maturity in excess of one year.
The capital market is divided into primary and secondary markets.
What is a primary market?
A primary market is a market for the sale and purchase of newly issued securities of a company or government. It is also called new issues market. The proceeds realized go to the issuers i.e. the entities selling the securities.
What is a secondary market?
A secondary market is a market such as Securities Exchange (SE) and Over the Counter (OTC) market where existing securities of companies and exchange etc… governments are bought and sold through the services of a broker. Examples are Stock Exchange, OTC, commodity Exchange, etc.
The proceeds of the sale go to the selling investor. The secondary market provides liquidity to investors by ensuring easy conversion of their securities into cash.
What is a share?
A share (equity or stock) is a unit of ownership in a company. When you buy a share, you become a part-owner or shareholder
Why should I buy shares through a stock broker? Can’t I go to the Stock Exchange to buy shares myself?
As an investor, you cannot go to the Stock Exchange to buy or sell shares. It is only stock brokers who are licensed and registered professionals permitted to trade in shares on the Stock Exchange.
They have the professional skills and experience in securities business. They can also provide the necessary advice on which shares to buy and when to buy. However, the final decision to invest your money is left for you, the investor.
Where else can I buy shares in case I miss any Public Offer?
In case you miss a public offering, you still have an opportunity to buy shares from the secondary market through a stock broker.
To make a wise decision, you should take the following precautions:
- Make sure that the stock broker has a valid registration with Securities and Exchange Commission, SEC Nigeria as well as being a current member of the Stock Exchange.
- Ask your stock broker for a contract note each time you buy or sell shares listed on the Stock Exchange. Also, carefully read the information contained in the contract note. Make sure you give the correct information to your stock broker when needed.
- Always ask your stock broker questions in case there is anything you do not understand.
Please Note: When you hand in your share application form, share allocation is made to all the people that have applied. This is to make sure that everyone has some units of the shares being offered.
If the offer is over-subscribed (that is applications exceeding the number of shares available), the shares available are distributed among applicants according to a given allotment criteria i.e. predetermined guidelines for distributing the shares and the investor then receives a refund for the shares paid for, but not allotted to him or her.
Share certificates are then sent to all successful applicants. As an investor, you receive your share certificate from the stock broker or authorized selling agent through whom you bought the shares. (A share certificate is a document that is evidence of part ownership of a company. It is a valuable document and must be kept safe.)
What are the benefits of investing in shares?
There are several benefits that come with owning shares. These include:
Dividends – when companies make profit, the board of directors may give a percentage of the profit to its shareholders. This is known as dividend.
In other cases, the directors can propose to retain the profit in the company (retained earnings) in order to increase its capital or interest.
Shares therefore offer the possibility of increased income to investors. Declared dividends are paid by warrant or transferred electronically into an investor’s bank account provided bank account details have been submitted to the stock brokers/registrars.
Capital gains – when shares are sold at a price that is higher than the price at which they were purchased.
Collateral – Shares can sometimes be accepted as collateral.
Transferability – Your stockbroker will explain the process to you.
Bonus Shares – This is an offer of free additional shares to existing shareholders at no additional cost, in proportion to their holdings.
Are there disadvantages in investing in shares?
Yes, there are disadvantages in owning shares:
Share price can fall depending on a number of factors such as the performance of the company, the economy, demand and supply etc.
If the company’s profits fall, the dividend may fall and if the company makes a loss, it may not be able to pay any dividend at all.
– If the share prices fall, the value of the share also falls.
– If the company becomes bankrupt (insolvent), its shares also lose value.
– If the company goes into liquidation i.e. if it has to be folded up, shareholders are the last to be paid after all creditors.
Do all shares have the same price? And what is the minimum unit (number) of shares that I can buy?
No, all shares do not have the same price. For the Public Offer, the minimum number of shares is usually stated in the company’s prospectus i.e. a document containing information on the company and offer, however in the secondary market there is no limit (minimum) number of shares you can buy.
What is a prospectus and why is it important?
A prospectus is a selling document containing detailed information about the company (issuer) and its securities being offered to the public to enable investors make well informed decisions.
This document is usually filed with and vetted by the Securities and Exchange Commission, SEC Nigeria for completeness and accuracy before it is released to the public.
It is important because it is a legal document between the issuers and the investing public. It is also important to read and understand the contents of the prospectus because it states among others:
– The purpose of offering the securities to the public,
– The description of the company’s business,
– The legal status of the company,
– The financial statement of the company,
– The rights of the shareholders, directors and employees,
– The price of the securities.
If I encounter any problem with my stockbroker regarding my investments, what do I do?
If you have a problem with your stock broker, discuss with the Manager of your brokerage firm. If the problem is not resolved, make your complaint in writing and ask for response. If the problem is still not resolved to your satisfaction, then, you can write to the Director-General, Securities and Exchange Commission, SEC Nigeria who will ensure that the matter is resolved.
In case you are not satisfied with the Securities and Exchange Commission, SEC Nigeria’s decision, you may proceed to the Investments and Securities Tribunal (IST).
How can I invest wisely?
A wise investor always makes sure that during public offerings, he/she buys shares through the authorized agents stated in the prospectus in addition to keeping proper records of all investments made.
Also note the following:
- Always ensure you get your Central Securities Clearing System (CSCS) statement of account.
- Always read the Stock Exchange market report that appears in the news paper to enable you analyze price movements in the market.
- Keep yourself informed about the companies in which you have invested.
- Always consult your stock broker or other registered investment advisers for further advice C.S.C.S?
What is it? Really! Tell me more about this CSCS.
There used to be difficulties in transfer of shares an production of new certificates for traded securities. Also, trading transactions done on the floor of the Stock Exchange used to be documented manually which created settlement delays in deliveries.
It provides for an integrated Central securities depository clearing (electronic/book-entry transfer of shares from seller to buyer) and settlement (payment for bought securities) for all stock market transactions.
All securities listed on the Stock Exchange must have their certificates deposited in CSCS before transaction can take place on them on the floor of the Stock Exchange.
In order to address these shortcomings, the Stock Exchange incorporated a subsidiary company, the CSCS on 2971992 to implement a computerized Stock Exchange Management System.
The emphasis of the CSCS was the dematerialization of share certificates in a Central Securities Depository and the elimination of the many challenges being encountered by registrars and company executives in issuing new certificates to investors.
How does a company raise funds from the capital market?
A company can raise funds through any of the following processes:
- Initial Public Offer (IPO) which refers to the first offering of shares of a company to the general public for subscription.
- Public Offer which means offering of shares of a company to the public for a subsequent time after the initial public offer.
- Offer for Sale which refers to sales of shares by owners of existing shares to members of the public.
- Rights Issue is an offer for purchase of shares which is made only to the
existing shareholders of a company.
- Private Placement occurs when high net worth individuals or institutional investors are invited to buy a company’s shares at a fixed issue (pre-determined) price.
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