Monday, July 14, 2008
ADVANCE STOCK TIPS
Digging Deeper Into Bull and Bear Markets
Almost everyday in the investing world, you will hear the terms "bull" and "bear" to describe market conditions. As common as these terms are, however, defining and understanding what they mean is not so easy. Because the direction of the market is a major force affecting your portfolio, it's important you know exactly what the terms bull and bear market actually signify, how they are characterized and how each affects you.
What Are Bear and Bull Markets?Used to describe how stock markets are doing in general - that is, whether they are appreciating or depreciating in value - these two terms are constantly buzzing around the investing world. At the same time, since the market is determined by investors' attitudes, these terms also denote how investors feel about the market and the ensuing trend.Simply put, a bull market refers to a market that is on the rise. It is typified by a sustained increase in market share prices. In such times, investors have faith that the uptrend will continue in the long term. Typically, the country's economy is strong and employment levels are high. On the other hand, a bear market is one that is in decline. Share prices are continuously dropping, resulting in a downward trend that investors believe will continue in the long run, which, in turn, perpetuates the spiral. During a bear market, the economy will typically slow down and unemployment will rise as companies begin laying off workers.Where Did the Terms Come From?Well, the origins of these two terms are unclear, but here are two of the most common explanations:
1. The bear and bull markets are named after the way in which each animal attacks its victims. It is characteristic of the bull to drive its horns up into the air, while a bear, on the other hand, like the market that is named after it, will swipe its paws downwards upon its unfortunate prey. Furthermore, bears and bulls were literally once fierce opponents when it was popular to put bulls and bears into the arena for a fight match.
2. Historically, the middlemen who were involved in the sale of bearskins would sell skins that they had not yet received, and, as such, these middlemen were the first short sellers. After promising their customers to deliver the paid-for bearskins, these middlemen would hope that the near-future purchase price of the skins from the trappers would decrease from the current market price. If the decrease occurred, the middlemen would make a personal profit from the spread between the price for which they had sold the skins and the price at which they later bought the skins from the trappers. These middlemen became known as bears, short for "bearskin jobbers", and the term stuck for describing a person who expects or hopes for a decrease in the market.
Characteristics of a Bull and Bear MarketAlthough we know that a bull or bear market condition is marked by the direction of stock prices, there are some accompanying characteristics of the bull and bear markets that investors should be aware of. The following list describes some of the factors that generally are affected by the current market type, but do keep in mind that these are not steadfast or absolute rules for typifying either bull or bear markets:
Supply and demand for securities - In a bull market, we see strong demand and weak supply for securities. In other words, many investors are be wishing to buy securities while few are willing to sell. As a result, share prices will rise as investors compete to obtain available equity. In a bear market, the opposite is true as more people are looking to sell than buy. The demand is significantly lower than supply, and, as a result, share prices drop.
Investor psychology - Since the market's behavior is impacted and determined by how individuals perceive that behavior, investor psychology and sentiment are fundamental to whether the market will rise or fall. Stock market performance and investor psychology are mutually dependent. In a bull market, most everyone is interested in the market, willingly participating in hopes of obtaining a profit. During a bear market, on the other hand, market sentiment is negative as investors are beginning to move their money out of equities and waiting in fixed-income securities until there is a positive move. In sum, the decline in stock market prices shakes investor confidence, which causes investors to keep their money out of the market - which, in turn, causes the decline in the stock market.
Change in economic activity - Since the businesses whose stocks are trading on the exchanges are the participants of the greater economy, the stock market and the economy are strongly connected. A bear market is associated with a weak economy as most businesses are unable to record huge profits because consumers are not spending nearly enough. This decline in profits, of course, directly affects the way the market valuates stocks. In a bull market, the reverse occurs as people have more money to spend and are willing to spend it, which, in turn, drives and strengthens the economy.
STOCK MARKET ANALYSIS
INTRODUCTION
Over the years the rich have build, grown and consolidated their wealth through the use of their fiscal power while the poor have only wondered how the rich have continue to grow richer by the day. The difference is obvious, the rich don’t just work for money, and they also make their money work harder than they do. Money is a good servant that can work for 24 hours and because of this the rich makes money while they are sleeping! This is why no matter how much the poor man exerts in physical labor he cannot measure up to the rich in wealth and affluence, until he learns the wisdom of putting ones money to work.
There is a limit to the level of success hard work can procure. Where hard work stops is where leverage begins. Leverage helps a person to achieve more with less. It was Archimedes who said,” Give me a lever and I will move the world” With enough financial leverage, even the poor can move the financial world in their favor. Making money to work is one of the leverage the rich have used over the years to shake the financial world. If the poor can learn too, how to work more with their fiscal power than their physical power, they too can become rich in no time.
One of the ways the rich put their money to work is by investing in the stock market. The stock market over the years represents a goldmine of opportunities for those who are well informed about it. But unfortunately in this part of the world, despite the Nigerian stock market being one of the emerging markets in the world, many Nigerians don’t yet know how to invest intelligibly in the stock market. If Nigerians today knows a little bit about the stock market, then all thanks most go to the recent banking capitalization exercise. Except for this many NIGERIANS HAVE NOT EVEN HEARD THE WORD ‘SHARES’ BEFORE. Statistics shows that less than 10% of Nigerians invest in the stock market, this is low compared to empower and developed nations like America that has over 60% of its population actively investing stock market.
This handout will show you how to make money like the rich, by showing you what investment is all about, but with special emphasis on the stock market. However, before we go fully into the world of stock market invest; let us first understand the concept of investing and what it takes to be a successful investor.
WHAT IS INVESTMENT?
Before defining what investment is, let us understand first, some basic truths about investment.
Life is all about investment – There is an investment process that keeps life going. Life will cease when everything that makes it function cease to invest. Plants will die if it refuses to give up oxygen for man’s use. Equally, Man will die if it refuses to give up Carbon dioxide for plants use. The exchange of oxygen and carbon dioxide between plants and animals is what keeps life going. In real life investment, there is always an exchange of something good for something better. It is this exchange that we call investment.
All of us are investors, we only invest in different things – Why do we go to school? Why invest so many years in learning? We invest our time and energy in learning and acquiring education believing that our investment in education will give us a better life. Some invest in big families with the hope that there numerous children will take care of their financial future. Everyone basically understands what investment is al about, that is letting of something good for something better, even though we don’t invest in the same way and in the same thing.
INVESTMENT DEFINED
The act of committing money or capital to an endeavor with the expectation of obtaining an additional income or profit.
It’s actually pretty simple: investing means putting your money to work for you. Essentially, it's a different way to think about how to make money. Growing up, most of us were taught that you can earn an income only by getting a job and working. And that's exactly what most of us do. There's one big problem with this: if you want more money, you have to work more hours. However, there is a limit to how many hours a day we can work, not to mention the fact that having a bunch of money is no fun if we don't have the leisure time to enjoy it You can't create a duplicate of yourself to increase your working time, so instead, you need to send an extension of yourself - your money - to work. That way, while you are putting in hours for your employer, or even mowing your lawn, sleeping, reading the paper or socializing with friends, you can also be earning money elsewhere. Quite simply, making your money work for you maximizes your earning potential whether or not you receive a raise, decide to work overtime or look for a higher-paying job. There are many different ways you can go about making an investment. This includes putting money into stocks, bonds or real estate (among many other things), or starting your own business. Sometimes people refer to these options as "investment vehicles," which is just another way of saying "a way to invest." Each of these vehicles has positives and negatives, which we'll discuss in a later section of this tutorial. The point is that it doesn't matter which method you choose for investing your money, the goal is always to put your money to work so it earns you an additional profit. Even though this is a simple idea, it's the most important concept for you to understand. What Investing Is Not Investing is not gambling. Gambling is putting money at risk by betting on an uncertain outcome with the hope that you might win money. Part of the confusion between investing and gambling, however, may come from the way some people use investment vehicles. For example, it could be argued that buying a stock based on a "hot tip" you heard at the water cooler is essentially the same as placing a bet at a casino. True investing doesn't happen without some action on your part. A "real" investor does not simply throw his or her money at any random investment; he or she performs thorough analysis and commits capital only when there is a reasonable expectation of profit. Yes, there still is risk, and there are no guarantees, but investing is more than simply hoping Lady Luck is on your side.
Investing is also different from saving. Saving is about keeping what you have while investing is using what you have to get what you need. Saving is a defensive strategy while investing is an offensive strategy and profitable investors are always on the offensive.
WHY BOTHER INVESTING?
Obviously, everybody wants more money. It's pretty easy to understand that people invest because they want to increase their personal freedom, sense of security and ability to afford the things they want in life. However, investing is becoming more of a necessity. The days when everyone worked the same job for 30 years and then retired to a nice fat pension are gone. For average people, investing is not so much a helpful tool as the only way they can retire and maintain their present lifestyle.Whether you live in Nigeria , the U.S, Canada , or pretty much any other country in the world, governments are tightening their belts. Almost without exception, the responsibility of planning for retirement is shifting away from the state and towards the individual. Investment offers the opportunity for individuals to plan their financial future without leaving it to chance or government that are fast becoming undependable. In summary investing does the following
· Helps individuals to maximize their earning power while they are still working
· Guarantees security of tomorrow
· Preserves your earning power when you can no longer work as your money continues to work for you.
· Investment makes rich
SUCCESSFUL INVESTING
The key to successful investing is to become a successful investor. As it is in the investment world, the key to success is not determined by the investment vehicle but by the investor. The investor determines the success of is investment. Skills determine success. To become a good at investing an individual must possess the following three E’S of successful investing as identified by Robert Kiyosaki.
· EDUCATION – The word education here means financial education. It is the shortest distance between wealth and poverty. Proper education about the investment world does two things for the investor, it reduces risk and makes the investor skillful. The risk attached to investing is greatly reduced when the investor is well informed. This is why a prospective investor must spend time in learning before committing money to any kind of investment.
· EXPERIENCE – Experience comes via exposure. Limited exposure translates to limited experience. It is by making moves and making mistakes and learning along the way that we gain experience and become smart.
· EXCESSIVE CASH – Excessive cash comes via using both your education and experience overtime. The more money you make from investment the more risky investment you can take on. And the more risky investment you take on, the more money you can make.
We cannot cover all that is needed to become skilled at investing in this handout, but the basics provides a platform to launch from ,learn more and achieve more. Now we focus on the stock market.
WHY STOCKS?
There are different options open to an investor to invest is money. Of these different investment vehicles we have chosen to focus on stocks because of the following reasons.
1. Everyone plays the stock market – You may be aware of this fact or not, but every body plays the stock market. The entrepreneur or the businessman plays the stock Market by raising funds from the market to expand their business activities. An investor plays the market by investing in businesses that raise funds from the market and thereby partakes of its profits. Others play the stock market either by working for companies that are quoted on the stock exchange or by buying the products of these companies. As an outsider, a consumer of the products of the companies that are in the stock market, each time you buy any of there products you are simply making others rich. The producers in the economy are the entrepreneurs and the investors, while the consumers are those who buy the products made by these people. The consumer makes the producer rich.
2. An instrument for wealth creation - The three basic things people invest their money in includes shares, bonds and money markets products like savings or fixed deposits. Stock, as you will understand later, represents ownership. Bonds and savings represent ‘loanership’. Whatever you put in the bank is loaned out by the banks to other people to create wealth. When you loan your money is borrowed by owners who are using your money to create wealth for themselves. But when you own by buying shares you create wealth for yourself.
3. The perfect investment – The perfect investment by my definition is an investment that requires less effort to produce results. The perfect investment is also the investment that does not require your physical presence to make money. The perfect investment creates wealth without sweat. Investment in stocks meets this requirement. Your physical presence is not required to make money; only your fiscal power is needed.
4. It is the investment of the rich – All the richest people in the world plays the stock market one way or the other.
5. You don’t require big capital – investing in the stock market does not require much capital to start. For as low as a thousand naira you can start investing in stocks. This however depends on the stock broking firm you are using.
6. The Nigerian stock market - Given the beautiful performances recorded by the Nigerian stock market in recent years which has now place it among the best emerging stock market in the world, investing in stocks cannot come at a better time than this.
WHAT ARE STOCKS?
Plain and simple, stock is a share in the ownership of a company. Stock represents a claim on the company’s asset and earnings. As you acquire more stocks, your ownership share in the company becomes greater. There are two kinds of companies.
QUOTED AND UNQUOTED COMPANIES
Quoted companies: These are companies that their securities are available to existing and potential investors. For example are Nestle, Cadbury, NBC, and others. Presently there are over 20 companies quoted on the Nigerian stock Exchange. The shares of these companies are available for ownership interest by the public.
Unquoted companies: These are private companies whose securities are not listed on the stock exchange. Unquoted companies have private arrangements of selling their own shares and most of the time cannot be easily accessible by the investing public.
For an average individual, acquiring the stock of a publicly quoted company is much easier. Now imagine this, without having more than an average educational background, very little management training, without being an entrepreneur, without owning a company premises, and with as little as a thousand naira you can become one of the proud owners of a multinational company by buying their shares.
BEING AN OWNER
Holding a company’s stock means that you are one of the many owners called, shareholders. A shareholder is a person who has shares in a company. Any time you buy the shares of a particular company you become one f its numerous shareholders.
TYPES OF STOCKS
There are two main types of stocks: common stock and preferred stock.
Common Stock Common stock is, well, common. When people talk about stocks they are usually referring to this type. In fact, the majority of stock is issued is in this form. Common shares represent ownership in a company and a claim (dividends) on a portion of profits. Investors get one vote per share to elect the board members, who oversee the major decisions made by management. Over the long term, common stock, by means of capital growth, yields higher returns than almost every other investment. This higher return comes at a cost since common stocks entail the most risk. If a company goes bankrupt and liquidates, the common shareholders will not receive money until the creditors, bondholders and preferred shareholders are paid. Preferred Stock Preferred stock represents some degree of ownership in a company but usually doesn't come with the same voting rights. (This may vary depending on the company.) With preferred shares, investors are usually guaranteed a fixed dividend forever. This is different than common stock, which has variable dividends that are never guaranteed. Another advantage is that in the event of liquidation, preferred shareholders are paid off before the common shareholder (but still after debt holders). Preferred stock may also be callable, meaning that the company has the option to purchase the shares from shareholders at anytime for any reason (usually for a premium). Some people consider preferred stock to be more like debt than equity. A good way to think of these kinds of shares is to see them as being in between bonds and common shares.
HOW STOCKS TRADE
Stocks are traded on the stock exchange, which is a place where buyers and sellers meet and decide on a price. The major trading floor of the Nigerian Stock Exchange is in Lagos . There are two ways to access the stock market and buy shares.
PRIMARY MARKET-This is where securities or shares are created and made available through an instrument called the IPO. The term IPO means Initial Public Offering. An IPO is an invitation, usually the first, to the general public to partake in the share holding status of a company by buying the shares offered by the company. Many banks in the last few years have come to the stock market, issue IPO’s to raise funds for its recapitalization effort. After a company’s IPO is successful its shares are now listed on the stock exchange, which is the secondary market.
SECONDARY MARKET- this is often the place people refer to when they are talking about the stock market. In the secondary market shares of quoted companies are traded everyday from Monday to Friday. Most IPO’s can be purchased from banks or other places so announced by the company issuing the stock, but buying stock on the Nigerian stock exchange will require the service of a stock broker.
Over the years the rich have build, grown and consolidated their wealth through the use of their fiscal power while the poor have only wondered how the rich have continue to grow richer by the day. The difference is obvious, the rich don’t just work for money, and they also make their money work harder than they do. Money is a good servant that can work for 24 hours and because of this the rich makes money while they are sleeping! This is why no matter how much the poor man exerts in physical labor he cannot measure up to the rich in wealth and affluence, until he learns the wisdom of putting ones money to work.
There is a limit to the level of success hard work can procure. Where hard work stops is where leverage begins. Leverage helps a person to achieve more with less. It was Archimedes who said,” Give me a lever and I will move the world” With enough financial leverage, even the poor can move the financial world in their favor. Making money to work is one of the leverage the rich have used over the years to shake the financial world. If the poor can learn too, how to work more with their fiscal power than their physical power, they too can become rich in no time.
One of the ways the rich put their money to work is by investing in the stock market. The stock market over the years represents a goldmine of opportunities for those who are well informed about it. But unfortunately in this part of the world, despite the Nigerian stock market being one of the emerging markets in the world, many Nigerians don’t yet know how to invest intelligibly in the stock market. If Nigerians today knows a little bit about the stock market, then all thanks most go to the recent banking capitalization exercise. Except for this many NIGERIANS HAVE NOT EVEN HEARD THE WORD ‘SHARES’ BEFORE. Statistics shows that less than 10% of Nigerians invest in the stock market, this is low compared to empower and developed nations like America that has over 60% of its population actively investing stock market.
This handout will show you how to make money like the rich, by showing you what investment is all about, but with special emphasis on the stock market. However, before we go fully into the world of stock market invest; let us first understand the concept of investing and what it takes to be a successful investor.
WHAT IS INVESTMENT?
Before defining what investment is, let us understand first, some basic truths about investment.
Life is all about investment – There is an investment process that keeps life going. Life will cease when everything that makes it function cease to invest. Plants will die if it refuses to give up oxygen for man’s use. Equally, Man will die if it refuses to give up Carbon dioxide for plants use. The exchange of oxygen and carbon dioxide between plants and animals is what keeps life going. In real life investment, there is always an exchange of something good for something better. It is this exchange that we call investment.
All of us are investors, we only invest in different things – Why do we go to school? Why invest so many years in learning? We invest our time and energy in learning and acquiring education believing that our investment in education will give us a better life. Some invest in big families with the hope that there numerous children will take care of their financial future. Everyone basically understands what investment is al about, that is letting of something good for something better, even though we don’t invest in the same way and in the same thing.
INVESTMENT DEFINED
The act of committing money or capital to an endeavor with the expectation of obtaining an additional income or profit.
It’s actually pretty simple: investing means putting your money to work for you. Essentially, it's a different way to think about how to make money. Growing up, most of us were taught that you can earn an income only by getting a job and working. And that's exactly what most of us do. There's one big problem with this: if you want more money, you have to work more hours. However, there is a limit to how many hours a day we can work, not to mention the fact that having a bunch of money is no fun if we don't have the leisure time to enjoy it You can't create a duplicate of yourself to increase your working time, so instead, you need to send an extension of yourself - your money - to work. That way, while you are putting in hours for your employer, or even mowing your lawn, sleeping, reading the paper or socializing with friends, you can also be earning money elsewhere. Quite simply, making your money work for you maximizes your earning potential whether or not you receive a raise, decide to work overtime or look for a higher-paying job. There are many different ways you can go about making an investment. This includes putting money into stocks, bonds or real estate (among many other things), or starting your own business. Sometimes people refer to these options as "investment vehicles," which is just another way of saying "a way to invest." Each of these vehicles has positives and negatives, which we'll discuss in a later section of this tutorial. The point is that it doesn't matter which method you choose for investing your money, the goal is always to put your money to work so it earns you an additional profit. Even though this is a simple idea, it's the most important concept for you to understand. What Investing Is Not Investing is not gambling. Gambling is putting money at risk by betting on an uncertain outcome with the hope that you might win money. Part of the confusion between investing and gambling, however, may come from the way some people use investment vehicles. For example, it could be argued that buying a stock based on a "hot tip" you heard at the water cooler is essentially the same as placing a bet at a casino. True investing doesn't happen without some action on your part. A "real" investor does not simply throw his or her money at any random investment; he or she performs thorough analysis and commits capital only when there is a reasonable expectation of profit. Yes, there still is risk, and there are no guarantees, but investing is more than simply hoping Lady Luck is on your side.
Investing is also different from saving. Saving is about keeping what you have while investing is using what you have to get what you need. Saving is a defensive strategy while investing is an offensive strategy and profitable investors are always on the offensive.
WHY BOTHER INVESTING?
Obviously, everybody wants more money. It's pretty easy to understand that people invest because they want to increase their personal freedom, sense of security and ability to afford the things they want in life. However, investing is becoming more of a necessity. The days when everyone worked the same job for 30 years and then retired to a nice fat pension are gone. For average people, investing is not so much a helpful tool as the only way they can retire and maintain their present lifestyle.Whether you live in Nigeria , the U.S, Canada , or pretty much any other country in the world, governments are tightening their belts. Almost without exception, the responsibility of planning for retirement is shifting away from the state and towards the individual. Investment offers the opportunity for individuals to plan their financial future without leaving it to chance or government that are fast becoming undependable. In summary investing does the following
· Helps individuals to maximize their earning power while they are still working
· Guarantees security of tomorrow
· Preserves your earning power when you can no longer work as your money continues to work for you.
· Investment makes rich
SUCCESSFUL INVESTING
The key to successful investing is to become a successful investor. As it is in the investment world, the key to success is not determined by the investment vehicle but by the investor. The investor determines the success of is investment. Skills determine success. To become a good at investing an individual must possess the following three E’S of successful investing as identified by Robert Kiyosaki.
· EDUCATION – The word education here means financial education. It is the shortest distance between wealth and poverty. Proper education about the investment world does two things for the investor, it reduces risk and makes the investor skillful. The risk attached to investing is greatly reduced when the investor is well informed. This is why a prospective investor must spend time in learning before committing money to any kind of investment.
· EXPERIENCE – Experience comes via exposure. Limited exposure translates to limited experience. It is by making moves and making mistakes and learning along the way that we gain experience and become smart.
· EXCESSIVE CASH – Excessive cash comes via using both your education and experience overtime. The more money you make from investment the more risky investment you can take on. And the more risky investment you take on, the more money you can make.
We cannot cover all that is needed to become skilled at investing in this handout, but the basics provides a platform to launch from ,learn more and achieve more. Now we focus on the stock market.
WHY STOCKS?
There are different options open to an investor to invest is money. Of these different investment vehicles we have chosen to focus on stocks because of the following reasons.
1. Everyone plays the stock market – You may be aware of this fact or not, but every body plays the stock market. The entrepreneur or the businessman plays the stock Market by raising funds from the market to expand their business activities. An investor plays the market by investing in businesses that raise funds from the market and thereby partakes of its profits. Others play the stock market either by working for companies that are quoted on the stock exchange or by buying the products of these companies. As an outsider, a consumer of the products of the companies that are in the stock market, each time you buy any of there products you are simply making others rich. The producers in the economy are the entrepreneurs and the investors, while the consumers are those who buy the products made by these people. The consumer makes the producer rich.
2. An instrument for wealth creation - The three basic things people invest their money in includes shares, bonds and money markets products like savings or fixed deposits. Stock, as you will understand later, represents ownership. Bonds and savings represent ‘loanership’. Whatever you put in the bank is loaned out by the banks to other people to create wealth. When you loan your money is borrowed by owners who are using your money to create wealth for themselves. But when you own by buying shares you create wealth for yourself.
3. The perfect investment – The perfect investment by my definition is an investment that requires less effort to produce results. The perfect investment is also the investment that does not require your physical presence to make money. The perfect investment creates wealth without sweat. Investment in stocks meets this requirement. Your physical presence is not required to make money; only your fiscal power is needed.
4. It is the investment of the rich – All the richest people in the world plays the stock market one way or the other.
5. You don’t require big capital – investing in the stock market does not require much capital to start. For as low as a thousand naira you can start investing in stocks. This however depends on the stock broking firm you are using.
6. The Nigerian stock market - Given the beautiful performances recorded by the Nigerian stock market in recent years which has now place it among the best emerging stock market in the world, investing in stocks cannot come at a better time than this.
WHAT ARE STOCKS?
Plain and simple, stock is a share in the ownership of a company. Stock represents a claim on the company’s asset and earnings. As you acquire more stocks, your ownership share in the company becomes greater. There are two kinds of companies.
QUOTED AND UNQUOTED COMPANIES
Quoted companies: These are companies that their securities are available to existing and potential investors. For example are Nestle, Cadbury, NBC, and others. Presently there are over 20 companies quoted on the Nigerian stock Exchange. The shares of these companies are available for ownership interest by the public.
Unquoted companies: These are private companies whose securities are not listed on the stock exchange. Unquoted companies have private arrangements of selling their own shares and most of the time cannot be easily accessible by the investing public.
For an average individual, acquiring the stock of a publicly quoted company is much easier. Now imagine this, without having more than an average educational background, very little management training, without being an entrepreneur, without owning a company premises, and with as little as a thousand naira you can become one of the proud owners of a multinational company by buying their shares.
BEING AN OWNER
Holding a company’s stock means that you are one of the many owners called, shareholders. A shareholder is a person who has shares in a company. Any time you buy the shares of a particular company you become one f its numerous shareholders.
TYPES OF STOCKS
There are two main types of stocks: common stock and preferred stock.
Common Stock Common stock is, well, common. When people talk about stocks they are usually referring to this type. In fact, the majority of stock is issued is in this form. Common shares represent ownership in a company and a claim (dividends) on a portion of profits. Investors get one vote per share to elect the board members, who oversee the major decisions made by management. Over the long term, common stock, by means of capital growth, yields higher returns than almost every other investment. This higher return comes at a cost since common stocks entail the most risk. If a company goes bankrupt and liquidates, the common shareholders will not receive money until the creditors, bondholders and preferred shareholders are paid. Preferred Stock Preferred stock represents some degree of ownership in a company but usually doesn't come with the same voting rights. (This may vary depending on the company.) With preferred shares, investors are usually guaranteed a fixed dividend forever. This is different than common stock, which has variable dividends that are never guaranteed. Another advantage is that in the event of liquidation, preferred shareholders are paid off before the common shareholder (but still after debt holders). Preferred stock may also be callable, meaning that the company has the option to purchase the shares from shareholders at anytime for any reason (usually for a premium). Some people consider preferred stock to be more like debt than equity. A good way to think of these kinds of shares is to see them as being in between bonds and common shares.
HOW STOCKS TRADE
Stocks are traded on the stock exchange, which is a place where buyers and sellers meet and decide on a price. The major trading floor of the Nigerian Stock Exchange is in Lagos . There are two ways to access the stock market and buy shares.
PRIMARY MARKET-This is where securities or shares are created and made available through an instrument called the IPO. The term IPO means Initial Public Offering. An IPO is an invitation, usually the first, to the general public to partake in the share holding status of a company by buying the shares offered by the company. Many banks in the last few years have come to the stock market, issue IPO’s to raise funds for its recapitalization effort. After a company’s IPO is successful its shares are now listed on the stock exchange, which is the secondary market.
SECONDARY MARKET- this is often the place people refer to when they are talking about the stock market. In the secondary market shares of quoted companies are traded everyday from Monday to Friday. Most IPO’s can be purchased from banks or other places so announced by the company issuing the stock, but buying stock on the Nigerian stock exchange will require the service of a stock broker.
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