Capital Market Nigeria

It is now time to make money from the stock market again. There are usually two parts to stock markets- the bear and the bull. The bull represents rising up of price while the Bear represents the falling of price; whichever way, the price of any stock must go through this process.

Normally, all stock prices go up and down. There is no price that goes up that does not come down and there is no price that goes down that does not go up; whether good or bad stocks, penny stocks, blue chip, growth stock or defensive stock. For a while in the Nigeria stock Market, we have been seeing the downtrend of prices; that is the bearish movement of the stock market.

A market becomes bearish if the market capitalization has lost between 15 % to 20 %. It is therefore easy for us to say that most of the stocks have been down because they have lost 15 % to 20 %. I am sure if you bought your stock about 3 months ago, you would have been unhappy with yourself, but I am here to tell you that the bull is returning with the full force, but consider the following strategies.

1) Most of the stocks that have been down since the beginning of the capital market this year will definitely pick up this year.

2) Most of the stocks that had their year end two, three, and one and from this particular month should start picking.

3) Stocks that are going for normal public offer and private placements should generate you money.

Now to trade the bull market properly, these are the steps to consider

1) Find out the stocks that have lost 30% and below during the bearish, lost period and their hope of rebound.

2 Check out the stocks that have been losing since the bullish run started at the beginning of the year. They are the ones that will pick up in the advent of the return of the bull.

3) Check stocks that have 3 months before this month and one month to this month; they are good stocks to buy, buy confirm other fundamentals.

4) Buy stocks that have the prospect of bonus and good dividends.

5) Buy stocks that are newly listed

6) Never be too greedy in this bullish run, because no greedy man wins in the stock market.

7) Most of the stocks available now are good foe medium term and those that are for short term must be quick ones.

At this point we open doors for comments, feel free to add your own tips.

Why is a stock that costs N50 considered cheaper than another stock priced at N10? This question opens a point that often confuses beginner investors: the per-share price of a stock is thought to covey some sense of value relative to other stocks. Nothing could be farther from the truth.

In fact except for its use in some calculations, the per-share price is virtually meaningless to investors doing fundamental analysis. If you follow the technical analysis route to stock selection, it’s a different story, but for now let’s stick with fundamental analysis.

The reason we aren’t concerned with per-share price is that it is always changing and, since each company has a different number of outstanding shares, it doesn’t give us a clue to the value of the company. Gone are those days when Nigerian Breweries in the brewery subsector was the most capitalized company listed on the floor of the Nigeria Stock Exchange. In the market now the banks are in a tussle over which of them will emerge the most capitalized bank because of the measure of their value.

For that number, we need the market capitalization or market cap number. Find below current StockPicks’ 40 most capitalized stocks.

The market capitalization is calculated by multiplying the per share price by the total number of outstanding shares. This number gives you the total value of the company or stated another way, what it would cost to buy the whole company on the open market.

Here’s an example.

Stock price = N50

Outstanding shares: 50 million units

Market Cap:N50 x 50,000,000 = 2.5billion.

To prove my opening statement, look at this second example:

Stock price : N10

Outstanding shares: 300 million units

Market Cap: N10 x 300,000,000 = N3billion

This is how you should look at these two companies for evaluation purposes. Their per share prices tell you nothing by themselves.

What does market capitalization tell you? First, it gives you a starting place for evaluation. When reviewing a stock, it should always be in a context like ….. how does the company compare to others of similar size in the same industry? The market generally classifies stocks into three categories:

Small cap under N1billion units

Mid cap N1- N10 billion units

Large cap N10 billion units Plus

Some analysts use different numbers and others add micro caps and meg caps, however, the important point is to understand the value of comparing companies of similar size during your evaluation.

You will also use market cap in your screens when looking for a certain size company to balance your portfolio.

As I conclude this week, don’t get hung up on the per-share price of a stock when making your evaluation. It really doesn’t tell you much. Focus instead on the market cap to get the picture of a company’s value in the market place.