As a beginner in the Nigerian stock market, navigating your way through can seem like a difficult task.
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In this blog post we will be covering 8 basic stock trading terms you should know as a beginner. From simple terms like ‘stocks’ and ‘stock broker’ to more advanced terms like ‘mutual funds’ and ‘liquidity’. Understanding these terms is fundamental to your success as an investor in the Nigerian stock market.
Stock
A stock is a term that describes the ownership of any company. A share on the other hand describes the ownership of a particular company. When you purchase shares on the Nigerian stock market, you buy a piece of that company. The percentage of a company you own is determined by how many of that company’s shares you own. For example, if a company has 1,000 shares and you own 100 shares of that company, automatically you own 10% of that company.
There are two types of stocks on the Nigerian Stock Market:
Common stocks offer investors a form of partnership with the company. Investors buy stocks in exchange for a part of the company. Although, investing in common stocks comes with great financial risk to investors, it offers good returns on investment.
Preferred stocks represent ownership in the company and debt instrument. Preferred stocks offer a lower capital risk as opposed to common stocks. Therefore, if you are an investor looking for a high-yield dividend investment, preferred stock is your best option.
Dividend
A portion of a company’s profits is distributed to company shareholders. Investors can decide to collect their dividends in cash or re-invest and own more shares in the company. For long-term wealth creation the latter is the best choice. Investors can determine their dividend by estimating the dividend yield of the previous year.
Bonds
This is a loan to a company by an investor. When a bond is issued it provides a platform for companies and governments to borrow money from investors. For instance, a company needs to raise capital for a project. So, they issue bonds, each costing 20,000NGN to be paid back in 5 years with a 5% interest paid annually. Bonds provide a safer investment platform than stocks because they have fixed interest rates and if the company experiences a downturn, investors in bonds are paid first before stock-holders.
Stock Broker
A licensed professional that acts as an intermediary facilitating trades on the stock market, in exchange for a commission. Decades ago, investors had to hire stockbrokers to place trades. Now, times have changed, and technology has given rise to several online stock broker platforms, making it easier for investors to make investment decisions on the go. But it is important to note that a stock broker is not a financial analyst, therefore do not give investment advice. Instead, a stock broker only implements investor’s decisions.
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Mutual Funds
Individuals with the same investment goals pool their resources together to make a collective investment, managed by a professional for a commission.
For example, 4 friends are interested in investing in stocks and bonds to grow their wealth, but they lack the expertise, time and required resources to make a meaningful investment. So, they pull their resources together and invest in a mutual fund. This collective investment provides investors with limited expertise and resources, and access to diversified portfolios .
Bear Market
A period of significant decline in stock market prices, which is often followed by rising unemployment, and low investor confidence. In a bear market, most investors tend to sell their securities, resulting in low demand and high supply in the market. However, a bear market is the best time for long-term investors to buy stocks at a really low price and make significant profits when the market turns.
Bull Market
As opposed to a bear market, this is a period of sustained stock appreciation. This is a period of high demand and low supply, increasing stock prices.
Liquidity
The ease at which a company can sell its asset without a change in price and value. Liquidity comes in two forms. A liquid market means there are always investors willing to trade a stock at any price. Liquid assets can be converted to cash as quickly as needed without a change in price and value. A good understanding of how liquidity works will give investors a better understanding of when to enter and exit a trade.
The list of market terminologies are inexhaustible. However, these terms, explained in their simplest form, are an excellent start to diving into the investment world. If there are other terminologies you’ve heard in the stock world that you don’t understand, drop them in the comment below, and be rest assured to get the answers to your questions in the most simplified terms in our subsequent posts.
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