Tuesday, 30 August 2011

How To Start Investing In Shares

To invest in shares, there are two ways to go about it. These are through the primary or secondary market.

Investing In The Primary Market
Primary market activities include private placement, initial public offers (IPOs), public offer and rights issues. Engaging in any of the above-stated investments are referred to as investing in the primary market.

Where To Buy Into The Primary Market

Private Placement
To participate in private placements, the investors has to contact the issuing house (financial intermediary that co-ordinate and facilitate the fund raising process in the capital market) or buy directly from the company’s head office. Stockbrokers can also be contacted for guidance as most of them are usually aware of the placement.

Initial Public Offers (IPOs), Public Offers And Rights
Whenever there is an IPO or public offer, prospective investors can;
For banking offer, walk into any of the bank’s branches, pick and complete the application forms.
For other sectors other than banking, contact the issuing house(s) or stockbrokers
Download application forms from the company’s website. And duly completed forms can be submitted to the company’s receiving agents (banks, stockbrokers, issuing houses etc.).

What To Do When You Receive Your Share Certificate
When an investor buys shares from the primary market (Private placement, IPO and public offer), the company through its registrar issues a share certificate to the investor through the investor’s postal address after the offer.

As soon as the certificate is received, it is advisable for the investor to take the shares certificate to the company’s registrar through a stock broker. In certificate verification, the registrar confirms the transferor’s name, signature and particulars of shares transferred after which the shares are lodged in the depository of the Central Securities Clearing System (CSCS)-the clearing house of the NSE.

Investing In The Secondary Market

Step 1: To invest in the secondary market, you go through a stockbroker which is a registered member of the NSE.

A Stockbroker is an agent who buys and sells securities on behalf of investors in return for a brokerage (commission). The three major roles of the stockbroker are;
Make arrangement or quotation of stock (equity) on the exchange floor so that trading could take place
They act as investment advisors to investors (clients)
They act as agents in buying and selling of securities.

Step 2: Obtain, fill and submit an account opening form to the stockbroker. The account opening is free of charge. Although, some stockbrokers will compel you to provide a minimum amount of money for initial purchase to avoid a situation where accounts are opened and then left to go dormant. The duly completed form will be used by the stockbroker to open an account with CSCS on behalf of the investor.

The CSCS is the clearing house of the Nigerian Stock Exchange. It commenced operation on the 14th of April 1997. CSCS provides a central depository for the clearing and settlement of securities transactions in the Nigerian Stock Exchange (NSE).

Step 3: When your CSCS account is opened, you are informed through a TradeAlert (an electronic means of informing investors about the state of their account by CSCS). Once the CSCS account is opened, trading (through stockbrokers) can commence in the NSE.

Charges For Trading In The NSE
The fees and charges for buying and selling of shares in the Nigerian Stock Market are set by the Nigerian Stock Exchange (NSE). These fees are subjected to review. The current charges can be obtained from your stockbroker.

How To Make Money In Stocks
An investor can make money in stocks through dividends, bonus shares and capital appreciation.

In the stock market, some of the listed companies pay dividends yearly while others don’t, some give bonus shares, others don’t while some experience dramatic capital appreciation in price, others are just dormant. So it is advisable to study a company’s dynamics properly before investing in it.

Dividend is the cash reward given to shareholders of a company. It is part of the company’s profit after tax (PAT) that is distributed as cash to its shareholders. This depends on the company’s policies and needs. The amount the shareholders gets as dividend is equal to the dividend per share multiplied by his/her holdings (the number of shares).

Dividend Per Share =(Company' s PAT)/(Number of Shares)

Bonus Shares
Bonus shares which is sometimes called scrip issues or capitalized shares are additional shares given to existing shareholders in proportion to their holdings. A company issue bonus shares by capitalizing its undistributed profit after tax in the company’s reserve. This means that when bonus shares are issued, the share capital (on the balance sheet) has to increase by the nominal value of the newly issued shares. This balance by an equal decrease in another part of the shareholders funds (retained earnings or revaluation reserve).

Capital Appreciation
Capital appreciation is the profit realized when an investor sell the shares he/she holds at a price above the purchase price. This comes about through the increase in the company’s share price between when they are bought and sold.

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