How to invest in stocks

How to invest in stocks

For many people, investing in shares can be a very complicated process, but it can be made easy with a little help from professionals,

saving money and investing are part of steps that are often talked up by financial experts when asked to give tips that can lead to financial freedom.

When it comes to investing one option that is hardly left out is investing in stocks. However, not too many people are keen about dealing with all the figures they believe they will have to face if they invest in stocks. And then there are the terms they have to deal with – dividend, ordinary shares, percentages and money in kobo.

Experts, however, say that the apprehension by many people is unnecessary as with the help of professionals it is a great avenue through which people can put their money to work.

Also, the process is not as complicated as it is often taken to be.

Getting started

According to the Chief Executive Officer, Lambert Trust and Investment Company, a stock broking firm, the first step people should take when they decide to invest in stocks, having saved money for the purpose, is to get a good stockbroking firm.

He explains that through the firm, they would then be able to open an account with the Central Securities Clearing System, which in turn would make it possible for them to buy stocks.

He says, “They people cannot go out and buy (stocks) on their own; they must go through a stockbroking firm. If you are buying from the primary market, that is the one that the company advertises directly, in filling the forms, they must state the name of their stockbroking firm and their CSCS account number. For the secondary market, they must inform their stockbroker, who will then go to the stock exchange and buy for them on a daily basis.”

He adds, “Anytime a stockbroker wants to buy stocks – either equity or bonds, for an investor, they must be bought into that investor’s CSCS account. Anytime we trade on the floor of the Nigerian Stock Exchange, the accounts that are used in trading, where the stocks settle into are CSCS accounts. So, investors must have CSCS accounts.”

Building a portfolio

Investing in stocks is not just about buying  shares in as many company as possible, it involves taking more than how much is cash is available into consideration; it involves building a portfolio.

According to Adonri, after opening a CSCS account, the investor will sit down with the stockbroker for advice on the kind of security to invest in.

“Before this, the professional adviser – being the stockbroker – would do what we call a status check to establish the investor’s risk tolerance profile. After establishing the risk tolerance, the stockbroker will also examine the investor’s investment objectives,” he explains.

Adonri says based on both factors – risk tolerance and investment objectives, the stockbroker can construct a portfolio of security for the investor; built either solely on equity, mixture of equity and fixed income security or solely on fixed income security.

 He adds, “If the investor has a very high risk appetite, the professional adviser can also include some derivatives in the portfolio. Now we have the ETF derivative that is being traded actively on the Nigerian Stock Exchange, it is called the ABSA New Gold ETF.

“For the investor who has very low risk tolerance, his portfolio can be constructed around fixed income security. That way, the stockbroker can buy bonds for him, and can also invest in treasury bills.”

In considering the investment objectives, it is also important to look at the age of the investor.

Adonri says, “If it is a young investor, that investor can buy more of growth stocks; stocks that may not be paying good dividend now but they have very high potential to grow in the future. “

For an elderly investor, who is getting very close to retirement or is in retirement, he explains that the stockbroking firm will recommend a portfolio composed of mostly income stocks. In such cases, the professional adviser will consider stocks that have very steady history of dividend payment and construct the portfolio with such stocks.

Determining the right stocks to invest in

When it comes to choosing the right stock to invest in, experts say investors are mostly better off relying on their professional advisers.

Adonri explains that before an individual can determine the right kind of stocks to invest in, that person needs to be able to analyse the various factors that will impact on a sound investment or divestment decision.

“I know a lot of investors that don’t have the background and they also don’t have the tools for the analysis that is required before they can take well-informed decisions in the capital market.

“That is why it is important for those who do not have that kind of background to work with their professional advisers, who will advise them on the kind of stocks to buy, when to buy and when to sell,” he says, stressing that the analysis required “are too complicated for persons who do not have the competence.”

He, however, admits that it is possible for people to achieve this by themselves, saying “a lot of investors who have been investing for a very long time are able to pick these capabilities along the line. So, for them, they can select the kind of stocks they want to buy. But for the majority of investors, they need professional guidance.”

Right time to cash in on stocks

Experts say essentially, the market trend is not permanent and it is difficult to say “this is the time to come in” or “this is the time to exit”.

While Adonri admits that there is no hard and fast rule about the right time to cash in on stocks, he says generally, investors buy stocks when the prices are low or when the prices are falling. Then they might hold on for a long period so that the stocks would gather momentum.

“But again, you can hold on and they would be changes in the market and the global economy and everything crashes on you. So, it depends on the tenacity of the expert; his or her ability to cash in on values and then cash out when the situation calls for it or when value is being lost in the market,” he adds.

Basically, he explains, once the investor has a good stockbroking firm, and opens an account with CSCS, he or she can proceed to invest in shares; the success or failure of the investment depends on market trends and the expertise of the professional advisers being used.