Shares are units of a company sold to investors. You invest in equities by buying units of shares of a company listed on the stock exchange. Investors invest in shares with the expectations of a rise in value which leads to capital gains (AKA share price appreciation) and the annual dividend income shareholders receive from companies they’ve invested in.
Being a shareholder means you own part of a company. Shareholders share in the company’s profit or loss. Companies issue shares to raise funds for expansion and other major projects. Oftentimes, the shares are listed on an exchange where investors can sell or buy more units of such companies.
Equities are known to be one of the most profitable asset class, they are also popular for being risky, as shareholders bear the brunt of falling share prices and company bankruptcy. Effective monitoring and management of an equity portfolio are central to being a successful investor in shares.
Children, generally, have long investment time-frames. Given the fact that equities are most ideal for long term investors, they are best for children. It is common knowledge that stocks give the best return over a long period of time. FSDH (a leading investment bank in Nigeria) carried out research on the best-performing stocks in the Nigerian Stock Exchange within a 10 year period (2008-2018).
The table below shows the performance of the best 10 stocks between 2008 and 2018. This performance includes share price appreciation, dividends, and share bonuses.
Best Performing Stocks in the Nigerian Stock Exchange from 2008 to 2018 Stock Return
- Guaranty Trust Bank 1100%
- International Breweries 1061%
- Nestle Plc 874%
- Access Bank 167%
- FBN Holdings 45%
- UBA 228%
- Nigerian Breweries 314%
- Ecobank 416%
- Stanbic IBTC 345%
- Zenith Bank 433%
Besides capital gain, annual dividend payment (which a lot of people ignore) is a way of earning returns as a shareholder. The more shares you own, the more dividend you’ll receive. I’ll put this in perspective, Zenith bank recently declared a dividend of N2.50k per share. This implies that if you own 100,000 units of Zenith bank shares you’ll get N250,000 in dividends. Now imagine if you own 1,000,000 units of this same company.
Investing in the stock market (in Nigeria) is one of the cheapest forms of investment as you don’t have to start with a large sum of money. With the right advisor, you can dedicate a certain amount of money to buying shares at regular intervals. The trick is to buy blue-chip companies at record low prices (for example, GTBank recently fell to N18.10) and then accumulate over time depending on the type of investor you are.
As juicy as the returns on shares can be, they are also very risky. Uninformed investment in the stock can lead to a complete loss of invested funds. Hence, it is important that your investment in the stock market is guided. One of the ways of managing risk is diversification. I once met someone who invested N800,000 in Bank PHB. We all know how that ended. Imagine he had divided the money into 4 places and invested N200,000 each in 4 different stocks, it would have been a different story.
Diversifying is the key to managing risk; don’t put all your money in just one company, it is too risky. When investing in shares for children, start with 3 good companies and accumulate shares for them in those companies. If done right, by the time they come of age, the dividend income from those shares will give them a good start in life. I’ve heard of families that live off the dividend income of their late father. The amount runs into hundreds of millions.
I understand that the times are not in favour of the stock market but there is also a positive side to the bearish sentiment in the Nigerian Stock Market. Value companies are trading at record low prices, hence it is a good time buy. Remember the popular quote by Warren Buffet: “Be afraid when everyone is greedy and be greedy when everyone is afraid.” Also, understand that there is a method to buying, especially when we don’t know when the market will bottom out. Consult an investment advisor for guidance before investing in shares.