Investing in the Nigerian stock market can be intimidating for beginners, but it’s a great way to secure your financial future. There’s a lot of mathematics to understand for one to enter the market to understand how the stocks work. But you don’t need to be baffled or intimidated by them.
The complexity of the market has never stopped any great investor. You can sharpen your investment intuition and skills with the proper knowledge and skills. This guide will share some tips on how to invest in the stock market. It’ll also walk you through the basics of Nigerian stock market investment.
What is the Stock Market?
The stock market is a platform where companies raise capital by selling their stock shares to interested investors. While it’s an opportunity for these companies to get funding for their operations, it’s a bigger opportunity for investors who invest in these companies.
How? Simple. As the companies grow in value, so does the investor’s money grow.
Here’s an example, if you invest in Ravens & Sons Ltd, and they double their income within two years, your investment is double your initial deposit. If you bought a stock for #30, it’s now #60.
Beginners looking to invest in the stock market must understand that it involves building wealth over a long period. It’s also a beneficial yet risk-filled industry, but you’d reap profits if the company is stable in the long run. Once you understand that, everything else comes easy.
Here’s what I mean:
What makes the Nigerian stock market are publicly listed companies. However, nothing is permanent because successful companies may eventually lose money or go bankrupt (which will also affect their investors).
For example, if Diamond Bank were in the stock market and were a valuable asset, its value would decrease when it started to decline (before the merger with Access Bank). The decline in value also means that your asset/stock on the bank will reduce in value too.
Aside from this, your stock value can be affected by economic conditions, company performance, and market trends. These factors could either work in or against your favour, and you must understand that so you’d invest the money you can afford to lose.
Investing in the stock matter is a strategy to build wealth without relying on bank bonuses to double your income which will take 800 years to double (with 0.09% annual interest). This article will show you a step-by-step guide for beginners to invest in the stock market.
How to Invest in the Nigerian Stock Market As A Beginner
Buying and selling stocks isn’t only an investment cycle, it’s also a money-making adventure. These are the steps to embarking on that adventure;
You must do your due diligence, which doesn’t mean ascertaining the company’s revenue. This entails studying and understanding the risks and benefits of the stock market, how the market works, the types of investment available to you, and a solid plan for investing your money.
There are hundreds of resources for investment enthusiasts who don’t know their way around the finance world yet. From Peter Lynch’s One Up On Wall Street to John C. Bogle’s The Little Book of Common Sense Investing, you can feast on these authors’ opinions to sharpen your knowledge and invest in the stock market.
You can also opt for other options if you aren’t much of a reader. These options include free and paid online courses on websites like Investopedia and Khan Academy. You can also follow financial news outlets like Wall Street Journal, CNN Money, and Yahoo Finance to know the current news on the stock market.
Find a credible broker (If you want)
You need a broker to trade stock markets. Brokers are the middlemen between an investor and the company. Licensed professionals help people buy, sell, and rent securities. Now, they aren’t indispensable if you are well-versed in the industry.
There are other alternatives to a stockbroker, but you need guidance if you’re starting. Hence, you need a reputable broker that knows what they’re doing, and here’s how to get one;
- Check their credentials and professional memberships: Look for brokers and financial advisors licensed and registered with regulatory bodies, such as the Securities and Exchange Commission (SEC), Financial Industry Regulatory Authority (FINRA), or The Nigeria Stock Exchange Commission.
- Look for transparency and disclosure: Prioritize brokers who are upfront about their fees and services. Avoid those unwilling to provide this information or make unrealistic promises about returns.
- Consider their investment philosophy: Make sure the broker’s investment strategy aligns with your investment goals and risk tolerance.
- Read reviews and ask for references: Read their reviews on sites like Yelp and Google Reviews. You can also ask about them online or for references from people you trust.
Develop a plan
You can’t wing investments. You need to know information like the company’s growth, image, and financial stability to pour money into their business. Some of the things you need to develop a plan to invest in the stock market include:
- Set financial goals and limits
Financial goals give you a clear idea of what you’re working towards. It’s the best way to lay the groundwork for determining how much to invest in the stock market, your risk tolerance, and your current financial capacities. Also, don’t forget that the stock market is a long-term investment, and it’s safe to have some funds in emergency savings, so you won’t be compelled to sell your stocks when you need money.
- Choose the right investment mix
Your investment mix depends on your financial goals, risk tolerance, and time limits. A common strategy is to have a mix of stocks, bonds, and cash. While stocks are more volatile, they have the potential for higher returns. On the other hand, bonds are less volatile but offer lower returns.
Cash investments, such as money market funds, are generally the least risky but also with some of the lowest returns. Now, this is where you need a broker. A financial advisor can help you determine the right investment mix for your situation.
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Set a budget and stick to it
Budgets help you track your spending, save money, and reach your financial goals. However, you need to track your income and expenses to create a budget successfully. For instance, you must determine your fixed expenses, such as groceries and monthly spa visits, to identify areas to cut back on spending and invest in the stock market.
You should view and adjust your budget regularly to ensure it reflects your current financial situation. For example, a higher income can translate to higher savings.
Start small and diversify
It’s advisable to start small and gradually build your portfolio, especially if you are new to investing. Portfolio, in this context, means the number of assets or investments you own. Starting small helps you understand the market and gives you the luxury of making mistakes without substantial financial consequences.
Diversifying your investments is another way of mitigating stock market risks. You can invest in various companies, from startups to big ones. This way, you can spread out your risk and reduce the potential impact of one bad investment on your entire portfolio.
There are several ways to find diverse investment opportunities, including index and exchange-traded funds (ETFs). Index funds are mutual funds that oversee the success rate of a specific market index, like the S&P 500. ETFs are also similar to index funds but are traded on an exchange like individual stocks. Both index funds and ETFs offer a diverse range of investments within a single fund, making it easier to diversify your portfolio. How does this work for Nigerian beginners who want to invest in the stock market?
How Does the Nigerian Stock Market Work?
The Nigerian Stock Exchange (NSE), renamed the Nigerian Exchange Group, is the principal securities exchange of Nigeria. The NSE is responsible for listing and trading the country’s equities, bonds, and other securities.
You need a brokerage account with a Securities and Exchange Commission (SEC) registered broker (or intermediary) before you can sell or buy on the Nigerian stock market. The SEC regulates the Nigerian capital markets and ensures that your financial advisors are legit. When you open your brokerage account, you can only buy and sell securities on the NSE. You can’t buy or sell stocks from companies you know but aren’t listed on NSE.
The NSE operates on a market capitalization-weighted index called the NSE All-Share Index, which comprises all companies listed on the exchange. Simply put, the All-Share Index reflects the behavioural pattern of common shares listed on the NSE, creating a benchmark for the performance of the Nigerian stock market.
The NSE has four market segments, including:
- The Premium Board, for large and established companies
- The Main Board for public companies
- The Alternative Securities Market for small and medium-sized enterprises
- The FMDQ OTC PLC, for the market securities.
The NSE also has a system for trading called the Automated Trading System (ATS), which allows for the electronic buying and selling of securities. The ATS provides investors with an efficient, transparent, and fair trading platform, making trading easy for newbies looking to invest in the stock market.
Engaging in comprehensive research is essential if you want to invest in the stock market. This gives you necessary insights into the investment world, helps you understand it, and minimizes risks. Of course, investing in stocks is a risk, mainly if the companies you invest in failure to perform.
It would be better if you choose companies with the potential to grow exponentially in a few years. This is why it’s best to stay informed about the markets, review your portfolio regularly, and ensure you’re up-to-date with your investments. This way, you’re good to go.
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- Adetola Rachael is a content and copywriter. With experience in tech, entrepreneur, and casino niches, she relies on deep research to create quality, original, and marketable content.
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