By David Alade
Investing in the equity market is as seamless as saying buy/sell this for me. The real work lies behind the call to buy/sell. Why did you sell or buy or hold? What were your considerations? Your strategy?
Behind every buy/sell order lies 4 fundamental things. Liquidity consideration, Profitability consideration, Overall Company Financial Health consideration and Capital Gain/Dividend consideration. You really do not want to buy any stock without first considering these four things, but that doesn’t mean these are the only considerations, they are just fundamentals, remember.
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Liquidity
For anyone looking into equity investing the first thing you really want to consider is how liquid the stock is? What does it mean for a stock to be liquid – it is simply how easy it is to buy and sell the stock without affecting the asset value? A stock will be regarded as perfectly liquid if you can buy it for N7 and sell immediately for N7. To stress that point, it is the availability of the market for the stock.
As you go into equity investing, your first consideration will be liquidity. Your next question is how to know which stock is liquid? The answer to that is to check the Exchange website for top traded stocks. You may want to do this for like 2 weeks to be able to capture all stocks that are liquid. Create an Excel Sheet to save your findings, equity investing is not a play, Microsoft Excel will come helping a lot.
Do that and you have your liquidity question answered. The next you want to consider is your strategy which will follow below.
Capital Gain and Dividend Consideration
This is really about your strategy, do you care for capital gain or dividend?
Capital gain is the increase in the value of the stock you own. Capital gain would be said to have occurred if a stock you bought for N7 has appreciated to N10. That will be about 48% increase in value.
Dividend is the money companies’ payout to investors that own a share of their stocks. This is typically paid yearly (some bi-annual). If you own 10,000 units of a stock, and the company declared a dividend of N2 per share, you will receive N20, 000 as a dividend.
Now the question is which do you care for? Capital Gain or Dividend?
History has it that young people tend to value capital gain over dividend. That’s because really, it’s about growing your wealth not about having more cash, dividend put cash in your hand, and capital gain increases the value of your investment.
Once you decide on your strategic need; dividend or capital gain or both, your next concern is how do I know stocks that pay a dividend and those that don’t?
To answer this as well, get your Excel Spreadsheet ready you will do a bit of work, remember equity investing is not a play. You have earlier determined which stocks are liquid, those stocks I encourage you to go to their websites and navigate to “Investors Relation” there you will find the company’s financial statements. Download it up-to-the last 5 years (2018, 2017, 2016, 2015 and 2014). 5 years is just good enough, but not less so you can see the historical pattern of dividend payment.
Go to the page where the Income Statement is and below you will find the dividend declared for that year. If nothing, the company probably didn’t pay dividend for that year. Keep your 5-year record to know how much they historically payout in the dividend. Now you should have your questions on dividend answered.
If your focus is capital gain, just on the Exchange’s website (or Bloomberg), find the stock and view it’s 5 years historical trend at least. What is the pattern? Growing? Declining? Static? This should inform whether you should choose the stock.
Company Financial Health
This is a deep and somewhat complicated point. It will take more than an article to scratch its surface. Basically, you want to look at the whole financial statements, Balance Sheet, Income Statement, Cash Flow, Management Composition, and Corporate Governance. You see it’s a lot. So no deep diving on this.
Profitability
To be candid you don’t want to invest in a company that is not making a profit (yet). On a global scale, a lot of technology start-ups have been listing on NYSE with no profit but only Part to Profitability (PtP). But stocks like these takes more effort to understand, in that beyond the surface level analysis, you must understand its operations, and vision and the very PtP. If you don’t understand the business model, be wary of investing in such stock, I recounted my experience making similar mistake here.
But really, you may want to start with companies that are profit-making. And to know them, go on the financial statements you downloaded, and from the Income Statement, you will see their Profit after Tax (PAT). Use that to determine profitability, and going as far back as 5 years is also key.
What goes on behind buy/sell mandate?
The above is just a tip of an iceberg regarding what a typical equity investor will consider before giving a mandate to his/her Stock Broker. Do you still want to go into equity investing?
Disclaimer: this is not investment advice nor is it a call to invest, it’s basically for knowledge sake. Also, opinions are mine and do not represent that of any organization I am affiliated to.