The Nigerian Stock Exchange (NSE) was started in 1961 and was formerly called the
Lagos Stock Exchange. As at March 2003, over 200 securities could be traded on the
Nigerian Stock Exchange. The NSE has its head office in Lagos, with branches in
Port Harcourt, Kaduna, Onitsha and Ibadan, Kano, and Abuja. Shares are traded
from 11:00AM to 1:00PM on the NSE from Monday to Friday with the exception of
public holidays. A computer system is used by dealers (stockbrokers) to buy and sell
shares. This computerized system known as the ATS (Automatic Trading System)
allows dealers to enter buy and sell orders for shares into a computer which matches
the buying and selling orders at the matching prices.
The Securities and Exchange Commission
The SEC is the government agency that regulates the stock market. Its function is to
protect the investor and to build a strong stock market. The SEC passes and enforcesregulations to which quoted companies must abide.
Stockbrokers
As a private investor you cannot buy shares from the stock market yourself, you have
to go through a stockbroker. A stockbroker is licensed to trade shares on the floor of the stock exchange. Stockbrokers charge a commission termed brokerage for this.
The brokerage fees charged by stockbrokers are regulated by the Securities and
Exchange Commission (SEC).
For example, if you buy shares worth N10,000.00
you pay* -
Brokerage commission = 2.75% of 10000.00 = 275.00
Sec Levy = 1.00% of 10000.00 = 100.00
Contract stamp = 0.075% of 10000.00= 7.5
VAT =5.00% of 275 = 13.75
Total = N396.25
And if you sold shares worth N10,000.00 you pay a total of
Brokerage commission = 2.75% of 10000.00 = 275.00
NSE levy = 0.25% of 10000.00 = 25.00
CSCS = 0.25% of 10000.00 = 25.00
Contract stamp = 0.075% of 10000.00= 7.50
VAT = 5.00% of 275 = 13.75
Total = N 346.25
These rates may change over time.
Stockbrokers also provide you with investment advice. They may offer to manage
your investments for you. Stockbrokers also assist companies which want to float
(launch) new shares and bonds on the stock market.
To buy shares you need to open an account with a stock broking firm. Just like banks,stock broking firms require you to have a minimum amount before you can open an account with them. Some of the big firms will need you to have at least N100,000.00 while some smaller firms can open an account for you with just N2,000.00. The money you use to open the account with the stockbroker is your money and is used to buy shares for you. You are not paying it to the stockbrokers. The stock broking firm profits by taking a commission from every trade they carry out for you.
Thursday, February 17, 2011
WHAT IS A STOCK MARKET?
“I want to be so rich, that when I write a cheque, the bank will bounce”
– Robert Allen in “ Multiple Streams of Income” stock market (or capital market) is a place where stocks, bonds, and other securities are traded. A stock exchange is the body that runs a stock market.
Some stock markets are not run by any major body, but are coordinated by their
dealers. These are termed over the counter (OTC) e.g. the NASDAQ in America. The
stock market in Nigeria is run by the Nigerian Stock Exchange (NSE).
Functions of the stock exchange.
The stock exchange helps companies generate capital. As a primary market, it
provides an avenue for them to sell new shares and bonds to investors. The
companies can then use the proceeds from these sales to expand their businesses,
develop new products, buy new equipment etc.
The stock market also provides a means for investors to trade in the shares of
companies they own among themselves. In other words, it serves as a secondary
market. For example, one who bought the shares of a company at a particular price
may sell it to another investor. The investors are the ones who profit from this type of trade – companies do not.
The stock exchange also has the function of upholding rules and regulations so that
shady people do not cheat investors of their hard earned money. It gives investors
security. The stock market also provides a means for investors to trade in the shares of companies they own among themselves. In other words, it serves as a secondary market. For example, one who bought the shares of a company at a particular price may sell it to another investor. The investors are the ones who profit from this type of trade – companies do not. The stock exchange also has the function of upholding rules and regulations so that shady people do not cheat investors of their hard earned money. It gives investors security
– Robert Allen in “ Multiple Streams of Income” stock market (or capital market) is a place where stocks, bonds, and other securities are traded. A stock exchange is the body that runs a stock market.
Some stock markets are not run by any major body, but are coordinated by their
dealers. These are termed over the counter (OTC) e.g. the NASDAQ in America. The
stock market in Nigeria is run by the Nigerian Stock Exchange (NSE).
Functions of the stock exchange.
The stock exchange helps companies generate capital. As a primary market, it
provides an avenue for them to sell new shares and bonds to investors. The
companies can then use the proceeds from these sales to expand their businesses,
develop new products, buy new equipment etc.
The stock market also provides a means for investors to trade in the shares of
companies they own among themselves. In other words, it serves as a secondary
market. For example, one who bought the shares of a company at a particular price
may sell it to another investor. The investors are the ones who profit from this type of trade – companies do not.
The stock exchange also has the function of upholding rules and regulations so that
shady people do not cheat investors of their hard earned money. It gives investors
security. The stock market also provides a means for investors to trade in the shares of companies they own among themselves. In other words, it serves as a secondary market. For example, one who bought the shares of a company at a particular price may sell it to another investor. The investors are the ones who profit from this type of trade – companies do not. The stock exchange also has the function of upholding rules and regulations so that shady people do not cheat investors of their hard earned money. It gives investors security
WHAT ARE SHARES
Shares (stocks) represent ownership in a company. When you buy shares you become a part owner (shareholder) of a company. Public companies have hundreds or thousands of owners. Each owner contributes a little towards the capital of the company. This contribution is represented by shares. As the owners of a company, the shareholders are entitled to dividends, and are also entitled to vote at the Annual General Meeting (AGM) of the company.
There are two main kinds of shares: ordinary shares (common stock), and preferential
shares. Preferential shares are usually owned by the founders of the company. We are
mainly interested in ordinary shares as this is the kind traded on the stock exchange. Ordinary shareholders are the risk-takers of the business. They share in the profits and losses of the business. If a company fails and goes bankrupt (folds up), its assets are sold (i.e. the company is liquidated) and the proceeds are used to pay its creditors and suppliers. The money is also used to pay its bondholders. If any money is left, the shareholders are paid last –the preferential shareholders, before the ordinary shareholders. If nothing is left, the Shareholders go empty handed. Thus they bear the risk of the business.
Ordinary shares usually have a par value and a market price. You might come across
the phrase “A 50k share sells for N3.00”. That means the share actually sells in the stock market for N3.00 – the market price. The 50k figure is the share’s par value, which means that the company’s shares are in units of 50k. This figure is of no practical relevance to us. It is used by accountants to balance the company’s books. Common stocks in American companies have no par value.
There are three ways investors make money in shares – dividends, capital
appreciation and bonus shares.
1. Dividends are paid in proportion to the number of shares a shareholder owns in
a company i.e. the more shares you own the more you will receive. For example
when a company declares a dividend of 35k, it means that a shareholder who
owns 10,000 shares in the company will get N3,500 as dividend payment. Most
companies pay a final dividend at the end of their financial year. In addition to
this, some companies also pay an interim divided around the middle of their
financial year. It is not compulsory for a company to pay its shareholders a
dividend. If the company made a loss for that year, it may decide to forgo paying
its shareholders any dividend.
2. Capital appreciation refers to the rise in the price of a share. If you buy a share at
N3 and it rises to N 6, your investment has doubled in value.
3. When a company makes profit, it does not pay it all out as dividend. It may
reinvest part of the profit. This increases the value of the company. After some
years, to reward shareholders, the company can create new shares to represent
this added value, and give these shares as a bonus or scrip issue to the
shareholders. Shareholders can retain these new shares or sell them, converting
them to cash. For example, a company can give its shareholders ‘One new share
for every Two held’ on a certain date. That means that the total number of shares
the shareholder owns in the company on the specified date will be increased by 50%.
Shares are securities. A security is a legal document that shows you own a particular investment. Securities can be traded in the financial markets. Other common types of securities are bonds, Certificates of Deposit (CD), Treasury Bills etc
Bonds
A bond is a legal document that shows someone owes you money with interest. It is
an IOU note. When you buy a bond you are loaning the seller money at a specified
interest rate. (Interest is the cost of borrowing money). The interest or coupon will be paid you yearly (or as stated) and finally the amount loaned, the principal or face value, will be repaid you (redeemed) at a specified date – the maturity date.
Governments, companies and public institutions can sell bonds. Generally bonds are
less risky than shares, but they give lower rates of return. There are different types of bonds – debentures, convertible bonds, floating rate, zero-coupon etc. The most secure bonds are the Federal Government Bonds. They are termed gilts. Your
stockbroker can help you buy bonds when they are on offer.
Certificate of Deposit
A Certificate of Deposit (CD) is a document that shows you have deposited money in
the bank for a period of time at a specified interest rate. CD’s are sold by banks, and attract a high interest rate. These rates range between 13-17%.CD’s are low risk
investments and are thus very secure, but their rates of return are lower than that of the stock market. They are issued (sold) by banks. If you own a CD and wish to get your money back before the maturity date, you can sell it at a discount. It is a liquid investment (easily convertible to cash).
Treasury Bills
Treasury bills are securities sold by the government. Treasury bills are sold at a
discount, and have their full value paid at maturity. For example, a N10,000 treasury bill can be bought at N9,300 and redeemed for its full value after a specified time, usually 90 days. Treasury bills are auctioned by the Central Bank. You can buy treasury bills from your local bank. Treasury bills are one of the most secure investments. Treasury bills and CD’s are called money market instruments.
.
There are two main kinds of shares: ordinary shares (common stock), and preferential
shares. Preferential shares are usually owned by the founders of the company. We are
mainly interested in ordinary shares as this is the kind traded on the stock exchange. Ordinary shareholders are the risk-takers of the business. They share in the profits and losses of the business. If a company fails and goes bankrupt (folds up), its assets are sold (i.e. the company is liquidated) and the proceeds are used to pay its creditors and suppliers. The money is also used to pay its bondholders. If any money is left, the shareholders are paid last –the preferential shareholders, before the ordinary shareholders. If nothing is left, the Shareholders go empty handed. Thus they bear the risk of the business.
Ordinary shares usually have a par value and a market price. You might come across
the phrase “A 50k share sells for N3.00”. That means the share actually sells in the stock market for N3.00 – the market price. The 50k figure is the share’s par value, which means that the company’s shares are in units of 50k. This figure is of no practical relevance to us. It is used by accountants to balance the company’s books. Common stocks in American companies have no par value.
There are three ways investors make money in shares – dividends, capital
appreciation and bonus shares.
1. Dividends are paid in proportion to the number of shares a shareholder owns in
a company i.e. the more shares you own the more you will receive. For example
when a company declares a dividend of 35k, it means that a shareholder who
owns 10,000 shares in the company will get N3,500 as dividend payment. Most
companies pay a final dividend at the end of their financial year. In addition to
this, some companies also pay an interim divided around the middle of their
financial year. It is not compulsory for a company to pay its shareholders a
dividend. If the company made a loss for that year, it may decide to forgo paying
its shareholders any dividend.
2. Capital appreciation refers to the rise in the price of a share. If you buy a share at
N3 and it rises to N 6, your investment has doubled in value.
3. When a company makes profit, it does not pay it all out as dividend. It may
reinvest part of the profit. This increases the value of the company. After some
years, to reward shareholders, the company can create new shares to represent
this added value, and give these shares as a bonus or scrip issue to the
shareholders. Shareholders can retain these new shares or sell them, converting
them to cash. For example, a company can give its shareholders ‘One new share
for every Two held’ on a certain date. That means that the total number of shares
the shareholder owns in the company on the specified date will be increased by 50%.
Shares are securities. A security is a legal document that shows you own a particular investment. Securities can be traded in the financial markets. Other common types of securities are bonds, Certificates of Deposit (CD), Treasury Bills etc
Bonds
A bond is a legal document that shows someone owes you money with interest. It is
an IOU note. When you buy a bond you are loaning the seller money at a specified
interest rate. (Interest is the cost of borrowing money). The interest or coupon will be paid you yearly (or as stated) and finally the amount loaned, the principal or face value, will be repaid you (redeemed) at a specified date – the maturity date.
Governments, companies and public institutions can sell bonds. Generally bonds are
less risky than shares, but they give lower rates of return. There are different types of bonds – debentures, convertible bonds, floating rate, zero-coupon etc. The most secure bonds are the Federal Government Bonds. They are termed gilts. Your
stockbroker can help you buy bonds when they are on offer.
Certificate of Deposit
A Certificate of Deposit (CD) is a document that shows you have deposited money in
the bank for a period of time at a specified interest rate. CD’s are sold by banks, and attract a high interest rate. These rates range between 13-17%.CD’s are low risk
investments and are thus very secure, but their rates of return are lower than that of the stock market. They are issued (sold) by banks. If you own a CD and wish to get your money back before the maturity date, you can sell it at a discount. It is a liquid investment (easily convertible to cash).
Treasury Bills
Treasury bills are securities sold by the government. Treasury bills are sold at a
discount, and have their full value paid at maturity. For example, a N10,000 treasury bill can be bought at N9,300 and redeemed for its full value after a specified time, usually 90 days. Treasury bills are auctioned by the Central Bank. You can buy treasury bills from your local bank. Treasury bills are one of the most secure investments. Treasury bills and CD’s are called money market instruments.
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