The ABCs of Equities Investments — #AfrinvestTalks

A lot of people get discouraged from equity investment in Nigeria because there are a lot of misconceptions about equities. We find that most people do not understand the basics of Equity investment. That is why we think it is important to start from scratch and break things down.

According to MyAccountingCourse, Equity Investment is “a financial transaction where a certain number of shares of a given company or fund are bought, entitling the owner to be compensated ratably according to his ownership percentage.

To help us unravel the myths and misconceptions about equities, we had a chat with Judith Osemeke on #AfrinvestTalks about “The ABCs of Equities Investments.” Judith is an Investment Analyst at Afrinvest and she did justice to the topic.

Here is a recap of the conversation.

What does it mean to trade equities?

First, we need to understand what equities are. Equities and stocks are the same things. When we say Equity, we really mean a stake of a company listed on the stock market (that has come to the public to raise capital).

So, what does it mean when you say you have stocks of a company?

Well, a shareholder. It is a representation of ownership. Therefore, equities trading involves the buying and selling of shares of companies in the stock market with an expectation to earn profits when the price of the stocks appreciates.

Difference between Equity investments and other investment classes

As we have already established, equity investing directly buys stocks of a company. That separates it from other investment classes. For example, mutual funds are a collective investment tool that pools together funds to invest in underlying assets such as bonds, equities, etc.

Dividend payments are quite unique to stock market trading. Put simply, a dividend is the sum of money paid to shareholders by a company out of its profits. The ability of a company to pay a dividend is relative to its profitability. While for example, you will earn a pre-determined interest on Treasury Bills and Coupon payments on Bonds investments, an investor in a dividend-paying stock will receive dividend payments on his proportion of ownership based on the company’s profitability.

It is also a key factor in determining what kinds of stocks an investor will buy.

We often hear talk about bullish or bearish market performance. Please differentiate these two concepts.

A bull market means one in which prices are rising. This could be caused by many factors such as good earnings releases, positive economic developments, etc. This will naturally have an impact on investors’ sentiment and in turn, encourage buying.

A bear market is a direct opposite. That is, one where prices are falling which leads to more selling.

You mentioned investors sentiment, please shed more light on that.

Investors’ sentiment is the general attitude of investors towards a stock or the market at large. Like I alluded earlier, this is majorly influenced by developments in the market or the economy, company news etc.

So, are there things a beginner should consider when getting their hands into Equities trading?

A lot.

First, you want to understand your investment goal. As simple as this seems, it is very crucial and lays the groundwork for many other aspects of investing such as your investment horizon and risk appetite, and that feeds into the kinds of assets you should be looking at. This then determines the kinds of returns proper for each kind of investment.

For example, a person in their 20s whose goal is more towards capital appreciation, is often considered to be more likely to have a longer investment horizon, right? That would mean that their portfolio will be able to withstand or bounce back from fluctuations, and is likely to expose a higher percentage of their overall portfolio to riskier assets such as equities.

What about those in their mid-30s? What is likely to be their goal?

One could still have a strong to moderate risk appetite. It is common to see risk appetites adjust depending on factors such as age, whether one is starting a family, etc. Find whether your focus is capital appreciation or capital preservation, or to focus on current income or speculation. That informs one’s level of risk exposure to their portfolio.

That is interesting. Are there more factors to consider?

Sure.

It is also particularly important to understand the nature of the business of stocks you are considering. This helps get a general sense of how profitable that business is, how affected the company would be if an economic crisis, etc. It should never just be about picking a random, popular name without a proper understanding of its business.

On understanding the company, how important is it to look at their financials?

It is extremely important.

It is proof of how well the company has performed over a given period. This information is public information and easily accessible on NSE’s website.

While it is understandable that not everyone will be able to dissect the financials thoroughly, you can take note of the top & bottom-line performance. Always look at the auditor’s notes and be best friends with your brokers. They will do a better job breaking down those abstract ratios to you. You can reach out to the Afrinvest Research team for that.

Are there more things to consider?

Last but by no means least, the macro-economic environment is very key when thinking of the performance of a stock. Think of it as a relationship between a fetus and a uterus.

The fetus will be safe and thrive if it is in a healthy and enabling environment. The minute something threatens the safety of the uterus, you start to see the impact on the life-force within.

So, is the performance of a stock closely tied to that of the company, which is, in turn, is dependent on the performance of the economy it operates in. For an investor, that means you must understand how various global or local events affect the economy.

It has become a tradition at #AfrinvestTalks to have a quick myth busters’ session. So, give us a few stock trading myths you have come across.

You need a lot of funds to invest in the stock market — FALSE.

The thing about equities trading is that one can start with any percentage of your portfolio you are comfortable with, based on the pricing of stocks you have been considering. You can always speak with your broker to figure out what works best for you.

Another is making buy or sell decisions based on the bandwagon or what everyone is doing. Trading solely on what other investors are doing is a common mistake. Same with buying based on price movements. Price movement is only one aspect of equities trading. Your goal should be to invest in companies that show good growth potential at a reasonable price.

What if the investment goal is to become a major stakeholder in the company?

One could still have a strong to moderate risk appetite. It is common to see risk appetites adjust depending on factors such as age, whether one is starting a family, etc.

KEY TAKEAWAYS

  • Equity trading involves the buying and selling of shares of companies in the stock market with an expectation to earn profits when the price of the stocks appreciates.
  • A dividend is the sum of money paid to shareholders by a company out of its profits.
  • Investors’ sentiment is the general attitude of investors towards a stock or the market at large.
  • Equity is the stake an investor owns in a company listed on the stock market.

#AfrinvestTalks is an interactive twitter chat that focuses on breaking down complex investment concepts with the goal of developing a community of avid investors. Follow Afrinvest on Twitter to join the conversation.