Investing in stocks and shares – take care in the shark infested waters

Investing in stocks and shares is a tricky business anywhere.

The value of your investment can obviously go up or down based upon the performance of the individual companies that you invest in or the overall performance of sectors or the whole index if you invest in “tracker” funds.

Investing in companies listed on the NSE is a different prospect altogether and not for the fainthearted.

There are many guides out there to direct you through the waters, the best of these is the excellent

However, it is worth pointing out a few of the sharks and icebergs that you can hit if you attempt to sail through the exchange unprepared.

Firstly, a couple of macro facts.

The exchange is not large either in overall value or individual market caps.

In addition, there is not a large volume of transactions.

This means the market has a tendency to be illiquid.

This lack of liquidity can mean that individual stock moves are surprising as any big fish in the small pond wishing to make a move can directly move the market.

However, due to a politically driven economic policy and related Nigerian petro-dollar/naira, moves in these areas are the biggest drivers of prices and market cap.

Just review the last 3 years of market data to see how unanticipated Federal Government action and policy has bought several sectors to their knees.

Moving to the micro factors, there are two big criteria that affect the value of a company.

The first is accurate and transparent reporting of actual results through filing of company financials.

There is normally news (around this time) of companies being sanctioned for failing to file on time.

Lots of noise around fines and suspensions.

However, the NSE cannot afford for its small pool to get smaller and so it is a rare circumstance for an offender with anything approaching a serious market cap to get anything more than a wrist slap.

The transparency of reporting in all exchanges relies upon accuracy of independent audits.

Unfortunately, these can not be relied upon in Nigeria.

The auditors and the tax man can be bought off, and regularly are.

So companies have little interest in accuracy of reports, preferring instead to balance their revealed tax liabilities with showing a sufficiently strong performance to keep the major shareholders happy.

Sometimes it is a hard balancing act.

The second main micro criteria is who the main shareholders are.

By any measure, the Nigerian economy is state run.

If the main shareholder(s) carry political clout, then a company can do well.

If however they fall from favour, then things for the company can become dire.

Any serious investor carefully reassesses their portfolio in the run up to a presidential election to ensure their exposure to this political risk is acceptable.

As in any format of investing, knowledge of your target company and its background are key.

In Nigeria you need to add a few more due diligence checks than normal.

However, if you can get the stars to align, there is money to be made.

Prices have taken a battering in the storm of the last 2 years, but perhaps it is abating and now is the time to jump on board before the market takes off in another frenzy.

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