Daily Independent (Lagos)
Emele Onu
22 October 2008
The Nigerian market is yet to respond to the many interventions coming locally and globally to save the financial system.
Even though some of the markets in Asia, Australia and Europe have gained points, Nigeria's all share index closed on Friday, October 17 at 44,712.41, sliding by 2.91 per cent while market capitalisation that opened the week at N9.73 trillion closed lower at N9.45 trillion.
The market's two key indicators have lost by about 40 per cent relative to their positions in March this year when the slump began.
Local, foreign, private and institutional investors are patiently waiting for signals that the downward trend will reverse, believing that the numerous interventions will in few weeks or months to come begin to impact positively on the market.
It will be recalled that the Federal Government intervened in the market in August by setting up the presidential advisory team on the capital market; cutting transaction cost by 50 per cent; introducing shares buy back to the tune of 20 per cent and enforcing one per cent maximum downward limit on the daily price movement of equities.
The Central Bank of Nigeria (CBN) later created room for the injection of N1 trillion into the economy by reducing the Monetary Policy Rate (MPR) and the Cash Reserve Ratio (CRR).
MPR is the rate at which the CBN lends to commercial banks. The CRR of banks was reduced from four per cent to two per cent. The CRR is the minimum reserve requirement a bank must hold in relation to its customer deposits and notes. The purpose of the reduction was to inject liquidity into the system, thereby raising the demand for various capital market instruments.
The reported intervention by the Nigerian Stock Exchange (NSE), involving a bail out by some banks to the tune of N600 billion was later denied by the regulatory authorities.
As hope is not lost that the market will bounce back, investors that have liquidity are advised to take advantage of the undervalued state of most equities to buy more shares and by so doing cushion their present losses.
But it requires investment niche to play the market successfully, especially in the bear season.
A market analyst and investment adviser, Oladipo Adewumi, said the best approach to the market in the bear period is to put money in those equities that have been beaten by the bears but which still parade strong fundamentals.
Such stocks, according to him, cut across the different sectors of the market.
"One of the ways to identify them in any industry or sector is to compare the equities current prices to the trailing, quarterly or forward earnings per share. The higher the earnings per share and the lower the share price of a particular equity, the better the stock is for the investor, all things being equal" he added.
It is not just enough to opt to buy when prices are generally low; one has to have the investment niche to be able to do that profitably. This cover report is aimed at developing that investment niche among readers.
Why investment niche?
The average person who begins trading in the share market often has little idea or knowledge as to what is required to become a successful share trader. Due to lack of that knowledge, the person has unreal expectations of how much money can be made or lost.
Most amateur investors enter stocks in the middle of a bull run (that is at the point of the rising market.) Such investors are spurred on by the media hype of rising share prices, the rumours of foreign investors entering the company, external investors taking over, rising company profits as well as prospects for cash and scrip dividend payouts.
Some amateur investors may experience early success and knowing no better ways, assume that money is easily made in stocks.
Such investors are not prepared for the sudden downturn in the share market which inevitably happens (a case in point is the prevailing downward market trend). When the bad time sets in, they become disillusioned and leave the share market never to return. Some of them may hang on hoping for a return to the good times which sometimes can take months and in some cases years.
Investments falling through cracks are not new to anyone. However, individual investors are affected differently by market downturn, the reasons being anything from lack of knowledge to miscalculated research, wrong strategy to unexpected moves, among others.
"Timing can be everything and it often means the difference between a profit and loss in the short term. Picking the correct performers in a hot sector requires careful planning," said Adewumi.
Every bull and bear market has winning and losing stocks that outperform their peers and the overall market. One of the most important steps in learning how to invest in stocks is recognising the signs of a company whose stock is about to soar.
The analyst said there were signs last week that oil prices were beginning to rise, after being battered by the global financial crisis.
"If you are investing internationally, you have to know that certain stocks will gain momentum in the oil sector. Some sectors will perform in the average while some will not perform as well.
Understanding investment niche can prevent the investor from losing money unduly in the stock market.
Adewumi advanced the following solutions to the investor eager for investment niche.
"It is important to determine objectives in advance. Catching up daily objectives not only tend to loose on opportunities for better long term investments but also does not give an investor to experiment with changing moves of the market. Hence, setting the monthly objectives is absolutely a better option for any investor.
"Every investor gets to come across a stage where he faces loads of investing tips, either from friends, colleagues or share broking firm. Developing an independent sense of investment is necessary. References from experts are good to be taken but decisions should be made on self study and analytical assessment. The investor should plan the investments to be made based on the expected future trends.
"The decisions regarding buying, holding and selling are the factors responsible for future profits and losses. It is not advisable to rush to these decisions as decisions taken under pressure may lead to disastrous results. A well-calculated and analysed step always pays more than anything else.
"Integrating one's investments into a sheer mix is recommended. That helps to diversify the risks and if one company generates a loss, the other can fill the gap.
"When the market is fluctuating and the investor is not sure whether to trade it or not, it is useless to trade. Do not trade for consistency or under pressure. Always trade when you are comfortable to invest thoroughly. Also, try and reduce the risk as far as possible by avoiding stagnant and volatile markets.
"It is not advisable to re-invest all the profits that are earned. The investor should always have a surplus account to save the profits.
"If the investor wants to hit the big-time gains, then he has to speculate. Trading penny stocks can permit the investor to do that. The reason being that big name brokers that manage huge hedge funds hardly play around in penny stocks. They manage billions of naira and would buy up every share in one trade. But when the investor is trading penny stocks, he has to select properly. It pays to always compare a particular stock with the industry average and also compare the earnings value with the earnings value of the industry.
"Determination and a killer instinct is a recipe for success. The never- give-up spirit and determination are very important to take losses, in the bear period. On the whole, it is important to stay encouraged and keep a positive psyche no matter how deep the market drifts.
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