Losing money in the stock market

Transcription

1 Losing money in the stock market An in-depth analysis

2 Outline Introduction Mistakes made by investors Why is the Nigerian stock market attractive now? NSE prospects 5 Recap 6 InvestNow

3 Introduction People expect to be rewarded for their investment, they believe that they should get higher returns than their initial investment but the greater the return, the greater the risk involved in achieving those returns, especially for stocks which have historically provided the greatest long term level of return but have also been accompanied by a greater portion of volatility.

4 Two costly mistakes made by investors Some investors treat the stock market like a casino, it is a known fact that people get lucky and make huge gains in the casino, but many people have also lost their life savings in the casino. The second mistake many investors make is failing to realize that investing in a stock means owning a part of a company, thus, it is imperative to invest in a company that you actually want to own.

5 Taking sensible calculated risks in the stock market can lead to minimal losses. The key word here is minimal because losing money in the stock market is almost inevitable. So what matters? being able to curtail one s losses. Many investors encounter huge losses due to irrational behavior.

6 Some misconceptions about the stock market Speculation consistently increases profits When an investor wants to make quality investments with a long term perspective, an in-depth research of the stock market is required but more often than not, investor always turn to speculators, thereby increasing the risk involved in investing their assets.

7 Some misconceptions about the stock market Speculation consistently increases profits Investors turn to speculators when they observe the short term price movements of a particular stock in an attempt to make quick profits, completely ignoring the intrinsic or fundamental value of the stock, this in effect, puts their initial investment at a higher risk. The intrinsic value of a stock is its actual value as opposed to its market price. For instance, if a security is trading at N50 but is actually worth N90, this means the company is trading at a discount to its intrinsic value, this is simply what value investors are interested in.

8 Some misconceptions about the stock market Speculation consistently increases profits The negative effect of ignoring the intrinsic value of a stock and trading based on sentiments is that the price is pushed to the extreme thereby causing the stock to become either overvalued or undervalued. However, value investors such as Benjamin Graham believe that people who invest in the stock market for long term do not have to worry about the fluctuations caused by speculators in the short term because in the long run, the true value of the stock market will be reflected in the stock price. On a final note, speculation can be highly profitable in the short term but can also be extremely unprofitable. It seldom provides a lifetime of viable income and therefore, should be left for people who do not mind losing their total initial investment.

9 Some misconceptions about the stock market Timing the stock market can consistently lead to beating the stock market Market timing involves making trading decisions based on predictions of future price movements in an attempt to beat the market. This means trying to buy stocks before the market goes up or sell before the market goes down.

10 Some misconceptions about the stock market Timing the stock market can consistently lead to beating the stock market One can predict a stock is undervalued through fundamental analysis but when the market will correct the stock price is actually unknown, so anyone trying to time when this will happen is simply speculating. Hence, it is best to invest for the long term. Market timing has been open to many controversies, but the most important thing to note is that it is not easy to be successful at it over the long run. Professionals can simply offer advice on factors that may cause the market to rise or fall but cannot tell for sure if the market will rise or fall.

11 Some misconceptions about the stock market Timing the stock market can consistently lead to beating the stock market For instance, only very few people in the world were able to predict the timing and causes of the global financial crisis of , conversely, few investors like Warren Buffet, consistently beat the market over a long period of time. This means that market timing is actually a matter of opinion but the fact remains that investors like Warren Buffet are just the exception, not many people can actually beat the market continuously unless one is an active trader, who consistently watches the market on a daily basis. if this is not the case, one should just focus on investing for the long run.

12 Some misconceptions about the stock market Every stock that goes down must surely come up This is another misconception about stocks and the stock market and it boils down to speculation. This is because not knowing the true value of a stock will always lead to assumptions being made about the stock s price. Normally, many novice investors without any prior knowledge of investing always assume that if a stock goes down, you should buy it because there is a good bargain somewhere in there and if a stock goes up buy it because a great opportunity may be missed if you do not buy it.

13 Some misconceptions about the stock market Every stock that goes down must surely come up Although, this turns out to be right sometimes because the market can be unpredictable, this is not always the case and novice investors may not know this because they have not done any fundamental analysis or even a technical analysis on the respective stock, they just speculatively buy more of the stock when in actual fact, the price of that stock may never come up.

14 Some misconceptions about the stock market Every stock that goes down must surely come up Thus, though it is advisable to invest for the long term, an investor must try to know when a stock has dipped and is never coming back up, in order to be able to sell and cut losses early, the easiest way to know this is by knowing the intrinsic value of the stock via a fundamental analysis. It is also worth mentioning that once a stock price declines more than 7% or 8%, investors should start thinking of disposing that stock (after an analysis and research have been done) because the company involved is most likely having serious issues.

15 so, what have we learnt so far? Remember; Do your research before investing in the stock market. Do not try to time the stock market, just invest for the long term. Some stock prices do not recover, know when to get out!

16 Why is the Nigerian stock market attractive now? Relatively cheap stocks on the Nigerian Stock Exchange (NSE) The price to earnings (P/E) ratio is the most common way to value stocks, it informs one on how cheap a stock is compared to other similar stocks. It also gives an idea of what the market is willing to pay for a company s earnings. When the P/E ratio of a company s stock is higher than that of other stocks in the same industry, it can signify two things: First, the market believes the company will enjoy increased earnings in the future or the stock is simply expensive or overvalued.

17 Why is the Nigerian stock market attractive now? Relatively cheap stocks on the Nigerian Stock Exchange (NSE) Despite these, it is normally better to invest in a stock that has a P/E ratio which is at par with or lower than other stocks in the same sector or the overall sector s P/E ratio, especially when the company that owns the stock has good financial statements and no impending problem.

18 Why is the Nigerian stock market attractive now? Relatively cheap stocks on the Nigerian Stock Exchange (NSE) Given this fact, it is important to note that the Nigerian stock market is relatively cheap compared to its peers in Africa and some other part of the world. This is because the P/E ratio of the Nigerian Stock Exchange All Share Index (NSE ASI) is one of the lowest amongst many emerging stock markets. This is depicted in the table in the next slide. It also suggests that this is a good time to enter the Nigerian stock market because its stocks have the tendency to appreciate over the long run.

19 where does the NSE ASI stand among its peers? Relatively cheap stocks on the Nigerian Stock Exchange (NSE) STOCK MARKETS P/E RATIO (TIMES) Ghana South Africa Kenya NIGERIA India 17.6 P/E P/E RATIO OF PEER MARKETS AROUND THE WORLD Ghana South Africa Kenya Nigeria India Ghana South Africa Kenya India COUNTRIES

20 Why is the Nigerian stock market attractive now? The opportunity to be well diversified Another way of losing money in the stock market is by not spreading the nonsystematic risk attached to the investment. Nonsystematic risk is the risk that is unique to a certain asset or company, the possibility of a company having poor earnings is an example of nonsystematic risk. In other words, diversifying risk is the best way to reduce the risk attached to equities investment and this involves investing in different stocks across the stock market. A single stock can drastically reduce in value in a very short period but if a portfolio contains about twenty stocks, all twenty stocks cannot go down in value at the same time,

21 Why is the Nigerian stock market attractive now? The opportunity to be well diversified except all stocks are in the same sector and may be, reacting to negative information about the sector in the same way. This suggests that while it is not wise to put all eggs into one basket, it is also not wise to put all baskets into the same truck. Thus, it is evident that the stock market gives investors the opportunity to diversify investments in various ways so as to reduce the risk involved in investing in it.

22 Why is the Nigerian stock market attractive now? The opportunity to be well diversified For instance, the Nigerian stock exchange features up to twelve sectors as seen in the table below, making it easier for an investor to choose from almost all the sectors in the economy. Furthermore, the sectors that made up a substantial part of the GDP after it was rebased in 2014,like the services sector are also listed on the NSE, thereby, giving investors the opportunity to invest in booming sectors. INDUSTRY SECTORS FEATURED ON THE NIGERIAN STOCK EXCHANGE Agriculture Conglomerates Construction/ Real Estate Consumer Goods Financial Services Healthcare Industrial Goods Information & Communications Technology Natural Resources Oil & Gas Services Utilities

23 Why is the Nigerian stock market attractive now? Improved structure of the NSE equities market Some investors have lost money in the Nigerian stock market due to loss of share certificates, misinformation such as a broker operating with a wrong mandate, fraudulent brokers. All these were happening some years back because the NSE did not have a well defined structure in place to facilitate an easier trading process. However, this is not the case anymore with the introduction of certain companies and a more modernized system, the NSE can now be seen as a transparent and sophisticated market. A major company introduced was the Central Securities Clearing System (CSCS). The CSCS makes sure that shares sold are delivered to the buyer and the payment of those shares is settled by the buyer. All these are done electronically thereby significantly reducing the period it takes a transaction to commence and end.

24 Why is the Nigerian stock market attractive now? Improved structure of the NSE equities market Before the introduction of CSCS, many investors lost money because some people sold shares they did not have and there was no electrical form of clarifying that they actually did have the shares as stocks were processed manually. This made the whole transaction process tedious, thereby creating opportunities for manipulations but today, the transaction process is now faster and more efficient, as the whole cycle takes a maximum of three working days to be completed. CSCS also issues out monthly statement to investors thereby facilitating transparency in the market.

25 Why is the Nigerian stock market attractive now? Improved structure of the NSE equities market Also, the NSE ensures that all dealing members operate on equal terms by enabling competition on the hierarchical basis of price, cross and time priority through an Automated Trading System platform with a central order book. This ensures that the whole trading process is fair and also not complicated, thus, minimizing any errors that can occur through the trading platform. A snapshot of the trading schedule can be found in the next slide. In short, the NSE equity structure has really improved over the years making the market more efficient and effective.

26 Why is the Nigerian stock market attractive now? Improved structure of the NSE equities market TRADING SCHEDULE

27 Why is the Nigerian stock market attractive now? The general growth of the Nigerian stock exchange (NSE) after the era of the Global financial crisis (GFC) During the (GFC) in 2007/2008, the Nigerian stock market took a turn for the worst as many investors made significant losses, in fact a lot of people lost confidence in the market and many thought it will never recover as prices of various stocks crashed. However, the NSE All Share Index (ASI) which is an index representing the general market movement of all listed equities on the NSE is currently at 41, points as at June 20, This can be compared to the era of the GFC when the ASI went as low as 20,827.17points at the end of 2009 from 54, points at the beginning of 2008.

28 Why is the Nigerian stock market attractive now? The general growth of the Nigerian stock exchange (NSE) after the era of the Global financial crisis (GFC) In addition, the market capitalization (cap) of the NSE ASI stood at N5.2trillion in December 2009, but as at 20 June, 2014 its market cap is at N13.5trillon. Market cap is the total value of issued shares of a publicly traded company and it is equal to the share price times the number of shares outstanding i.e. held by investors. From the figures above, it is evident that the market has made a significant recovery from GFC era, even amongst the global indexes, the NSE ASI now has a competitive edge as depicted in the first figure below. This is mainly due to general reforms in the financial and power sector and an increased foreign participation in the market.

29 Why is the Nigerian stock market attractive now? The general growth of the Nigerian stock exchange (NSE) after the era of the Global financial crisis (GFC) Also market regulators like the Securities and Exchange Commission (SEC) applied various tools such as the registration of market facilities, operators and securities to be traded in the market, monitoring, investigation, enforcement and rule making, all in a bid to restore investor confidence. Although, the NSE is recovering as various stock prices are increasing gradually, a fundamental analysis of any stock must still be done to know the true value of the stock before investing in the respective company.

30 Why is the Nigerian stock market attractive now?

31 Why is the Nigerian stock market attractive now? 2013 RETURN OF AFRICAN STOCK MARKETS REGIONS/COUNTRIES INDEX RETURNS (%) BOTSWANA DCI BRVM BRVRM CASABLANCA CASABLANCA 1.11 EGYPT EGX KENYA ASI MALAWI MASI MAURITIUS SEMTRI NIGERIA NSE ASI SOUTH AFRICA JSE ASI 8.87 TUNISIA BVMT Index -5.83

32 Why is the Nigerian stock market attractive now? GRAPH DEPICTING THE MOVEMENT OF THE NSE ASI OVER THE PAST YEAR Why is the Nigerian stock market attractive now?

33 NSE Prospects The rebasing of Nigeria s Gross Domestic Product (GDP) The Gross Domestic Product is the market value of all officially recognized final goods and services produced within a country in a given period. It measures overall economic activity and signals the direction of economic growth and welfare. It is an internationally recognized indicator for measuring the size of an economy in a given period of time. The rebasing of GDP involves replacing an old base year used to compile volume measures of GDP with a new and more recent base year or price structure.

34 NSE Prospects The rebasing of Nigeria s Gross Domestic Product (GDP) When an economy is growing, this will be evident in the sectors of the economy, some sectors will grow, new ones will be added. All these changes will be accounted for when calculating the new GDP so as to give a more current snapshot of the economy. It is a known fact that Nigeria is now the largest economy in Africa. This is a result of the rebasing exercise that happened recently which showed that the nominal GDP for Nigeria was much larger than previously estimated. The rebased nominal GDP stood at N54,204,795.12m in 2010, N63,258,579.01m in 2011, N71,186,534.89m in 2012 and (forecast to be) N80,222,128.32m in 2013.

35 NSE Prospects The rebasing of Nigeria s Gross Domestic Product (GDP)

36 NSE Prospects The rebasing of Nigeria s Gross Domestic Product (GDP) The GDP rebasing caused the debt-to-gdp ratio to reduce from 19% to 11% in 2013 and also the GDP per capita to increase from US$1,555 to US$2,688 in These factors boost investors confidence, hence, serving as major attractions for both local and foreign investors looking to invest in the equities market. An increase in GDP per capita suggests a higher purchasing power of the naira currency, this gives consumers access to more money, which can lead to more spending and consumption, giving rise to an increase in the profits of companies. When companies profits increase, their share prices will most likely increase.

37 NSE Prospects The rebasing of Nigeria s Gross Domestic Product (GDP) Also, increased spending can also enable smaller companies acquire adequate capital needed to list on the stock exchange and as more companies list, more people can invest, thereby owning and having a source of revenue The local investors then become happy with the stock market, thus attracting foreign investors because foreign investors will not come to a market if its local investors are not happy with the market. The introduction of foreign investors to the market will drive stock prices up, because they will increase the demand for shares already in issue, as a result market capitalization will also increase.

38 NSE Prospects The rebasing of Nigeria s Gross Domestic Product (GDP) The rebasing of the GDP confirmed that the Nigerian economy is now diversified as seen in the table below, the country is not as heavily dependent on crude oil and agriculture anymore as the service sector also make up a substantial part of the GDP. This shows that the country is now becoming more productive, which in effect can attract more foreign and domestic investors. Basically, the rebasing of the GDP depicts a better structure of the economy, thus giving investors access to accurate information, with which they can use to make investing decisions. For instance, the rebasing of the GDP showed that Nigeria has a large consumer base.

39 NSE Prospects The rebasing of Nigeria s Gross Domestic Product (GDP) It is important to note that foreign investment is only useful when the investors are in it for the long haul. When they are in it for short term, they hike up the prices and after a short while they take their investment out, thereby crashing the prices and disturbing the market.

40 The rebasing of Nigeria s Gross Domestic Product (GDP)

41 NSE Prospects The Power Sector Reform In Nigeria The Nigerian government introduced the power sector reform to encourage private and foreign investment in the sector and also demolish the monopoly that has been created overtime by National Electric Power Authority (NEPA). This was done by carrying out a competitive tender to receive bids from core investor groups for a minimum of 51% in equity in about eleven generating companies and about 180 applications were received. However, these groups are looking to buy a stake in these generating companies through loans from Nigerian banks, but since this is a long term investment, the banks have to raise the funds through the capital market to be able to get the adequate amount needed to loan the investor groups. Thus, while some banks are selling bonds, some are coming to the equities market like Diamond bank plans to raise about $300million from the equities market in addition to selling bonds to fund the investment and Access bank recently just got approval from its shareholders to raise about $1billion.

42 NSE Prospects The Power Sector Reform In Nigeria When all these banks come to the equities market to raise funds, they will issue out more shares, thereby increasing their market cap and that of the stock exchange. Likewise, the investor groups can decide to raise funds from the equity market by listing the newly acquired generating companies so as to facilitate the loan repayment to the bank. However, not many of the generating companies are listed but the NSE is doing its best to woo them to the equities market citing that the sector has huge potentials for growth. When this happens, the cost of the investment will reduce for the generating companies, thereby, increasing their earnings. This translates to higher share prices and higher market cap for the market.

43 NSE Prospects High demand for real estate in Nigeria Due to urbanization, the demand for real estate in Nigeria is very high at the moment, the sector is said to be worth over N160 trillion. Many people are building houses, estates, malls, office buildings. Prime office rents in Lagos are amongst the highest in Africa. The prime office rent in Lagos at US$85 (N13,600) per sqm per annum is second only to US$150 (N24,000) per sqm per annum of Luanda, Angola, in the African continent. Obviously to build houses, people are going to need cement, one will also have to paint as well as furnish.

44 NSE Prospects High demand for real estate in Nigeria Thus, if real estate is in demand this means, companies like Dangote cement PLC, Vitafoam Nigeria PLC, African paints (Nigeria) PLC will also experience an increase in sales, which will most likely lead to increased earnings and this may translate into higher share prices. From the analysis in the previous slides,, it is evident that The Nigerian equities market has high prospects, no wonder many domestic companies such as Seplat Petroleum Development Company PLC and Caverton PLC are now coming to the market to list in order to raise funds.

45 Lets do a recap! REMEMBER: Time not timing is the friend of the investor Do not try to speculate, try to invest for the long the long term. The key to successful investing is diversification There are different classes of diversification in the stock market; one can invest according to capitalization, sectors or indexes. This is where index fund comes in. However, have a clear understanding of the type of company you are investing in A stock broker may be able to give advice on investment decisions but it is also important to do your own research as well and have a perfect understanding of the type of company you will like to invest in and own.

46 Lets do a recap! Know your risk tolerance level Many investors lose money because they stray past their risk tolerance. They either invest more money than they can afford or they do not know when to cut their losses, as said earlier some stock prices do not recover from a loss so know when to get out instead of hoping it will come back up as it is always better to take a small loss than lose out completely. Finally, never invest in anything you do not understand Do not invest in any stock because you heard good things about it on the street or because everyone is investing in it.

47 Lets do a recap! Understand the company reasonably well because if you invest in it, you own it and of course no one wants to own a company that has no prospects. Thus, do your research, make sure you are not investing in an overvalued stock. While one may not end up being Warren Buffet, it is still possible to minimize losses on the Nigerian stock exchange, by understanding the company you are investing in and also understanding how the stock market works. However, if you do not understand or you need further advice, seek help by contacting an experienced and licensed stock broker, because they are in the best position to help you give advice and mitigate the risk of losing money in the stock market.

48 Think you want to give equities investment another try? INVESTNOW If you have lost hope in the stock market because you have been losing money, not to worry, UBA securities has professional and experienced brokers who can advice and assist you in the conception of a high-quality portfolio. Also, in order to continue giving our clients the best, UBA Securities is now offering an online trading platform called INVESTNOW, where interested investors can invest in the Nigerian stock market. A brokerage account is required to start trading in the stock market and the minimum amount required to open this account is zero Naira.

49 INVESTNOW INVESTNOW You can log on to the website through this link and click on enter Investnow. When you are in, scroll to the left of the page, when you click on brokerage account it gives you information on all the documents you will need to open the account. Next, you click sign up for an account then it takes you to the page where you can apply by clicking on apply online. Once you fill the form and upload all the necessary documents, click on submit and the account will be opened within 24 hours. An will be sent to you to acknowledge the opening of the new account and then you can start making money! For further information on INVESTNOW, please contact: Abiola Osinulu

50 CONTACT US Jude Chiemeka Chief Executive Officer [email protected] Ijeoma Daramola Head, Private Client Sales [email protected] Chidinma Chukwueke Head, Domestic Institutional Sales [email protected] Abiola Osinulu Team member Private Client Sales Officer in charge of Invest Now [email protected] UBA House (12 th Floor) Marina Lagos