IN SEARCH OF LIQUIDITY

Nigerian banks dig deep into pockets of Nigerians.

"The individual investor should act consistently as an investor and not as a speculator." — Ben Graham

There are two things the person reading this article can attest to. They are shocked at the number of ads on the stock market thrown at them in recent weeks. Secondly, they are tempted to buy a piece of these stocks. When did it all start?

In March 2024, The Central Bank of Nigeria released recapitalisation guidelines for Nigerian banks. The apex bank gave the commercial banks 24 months to fully comply with all the requirements or face penalties. One of the requirements was that commercial banks with international exposures’ new minimum capital requirement increased to N500bn from N50bn. Business Day So much to write about regarding the guidelines, but let’s focus on the main issue.

By the way, do you know that the shares of any listed company are available for purchase at any point in time if they are still listed? The sudden surge in the number of ads on the stock market should not be the reason you want to invest. You can always invest when you are ready and the time is right. Don’t allow the fear of missing out to drive your decision.

Every investment must be backed with adequate research, knowledge of the risks and returns and due diligence.

The stock market is volatile. By volatility, we mean there is no guaranteed return on your investment. All share prices will fluctuate in the bull and bear markets creating short-term wins and losses depending on the time of purchase and the average price. However, there is a common phrase in the market that you should never forget. “The time in the market is better than timing the market.” If you are not ready to play the long-term game, the stock is essentially not for you.

Let’s look at the returns. There are primarily two ways of making money in the stock market;  share appreciation and dividends. Share appreciation is the gain realised by the increase in the price of a stock above the (average) purchase price. So let’s say Mr A buys 1000 units of stock at N40 per share. If the stock appreciates to 50, It means Mr A has gained N10 on every share purchased. That’s a 25% gain (N10,000). At this juncture, it’s important to say a 25% ROI is huge if Mr A had bought 1,000,000 units (that would have N10m gain).

Your capital is as important as the returns in the market.

When it comes to dividends, the company can decide to declare a dividend of N10 per share. Mr A’s bank account will be credited with N10,000 while Mr B with 1,000,000 units goes home with N10,000,0000. But there is one crucial metric we calculate in dividends and it is called “dividend yield”. It’s the percentage of dividends paid compared to the share price. Back to our example, the N10 dividend on every share implies that 20% of the share price (N50) was paid as dividends. Take note, that not all companies declare dividends. While some declare both interim and final dividends. Gains on investment are tax deductible.

Lastly, it is important to ask the right questions before investing. Who are the management of this company? What’s the financial and non-financial performance of this company? What is the purpose of this extra liquidity? What’s the debt-to-equity ratio? What’s the loan deposit ratio? What is the percentage of non-performing loans? What is the future of this bank? Are there other beneficial investments I could invest in? What’s their dividend policy? What’s the share price growth rate? What drove the appreciation or decline over the years? What’s my share liquidation process? How will my dividends be paid?

The stock market makes people rich and poor at the same time. You aim to be above the curve and therefore must pay attention to the market to stay above the line.

I know you have questions and that’s why I have decided to host this Q&A session on Google Meet. Come ask me any question on the stock market and let’s provide you with adequate knowledge to empower you to make appropriate decisions. Check the flier for more information. Please share with your friends and family. Kindly confirm via this link: Q&A on Stock Market with Tosin Lawuyi.

Cheers to a Profitable lifestyle,

TL.