How to Approach the Stock Market

Before an investor can begin to trade successfully in the Nigerian stock market, there are some basic skills that one needs to be able to position oneself for maximum profits.

The Nigeria stock market is made up of two markets, the primary and secondary markets. A sound understanding of how these two markets operate is very vital if you are going to succeed. At this junction, let's x-ray these two markets to understand their workings.

1. THE PRIMARY MARKET

The primary market is where fresh funds are raised, anyone who buys shares in this market does not pay any commission, If a company's IPO is out for the public, all you do is to fill the form and issue your check,

The primary market is the period from the time of the IPO to the point where allotment was done and money returned to those who could not get all they requested for. The primary market is where both new (unlisted) and old (listed) can raise funds in the future either through PO, IPO, RIGHT ISSUES. Also, it is pertinent to mention here, that privete placement activities also are carried out by small sized companies that are aspiring to be listed at floor of the NSE also come to the public to raise funds privately.

2. THE SECONDARY MARKET

In order to have an enabling ground to buy and exit effortlessly, the stock exchange provides the platform for trading in listed company shares by institutions and individual. The secondary market is where potential investors can buy and sell such shares. Those who buy at the primary market who have received their share certificate and those who bought directly from the floor transact business at the primary market.

3. HOW THE SECONDARY MARKET WORKS.

Once a company is listed, trading on its shares commences. The issuer's broker announces the listing of the shares, immediately after which other brokers start trading on the company's shares from that day. Stockbrokers come to trade on behalf of stock brokerage firms; they are members of the Nigerian stock exchange and are represented at the trading floor by stockbrokers.

When a customer wants to buy a stock either by the advice of your stockbroker or on your own understanding, after the agreement on what to buy is reached, the customer gives his stockbroker a written mandate specifying those stocks. He will also fill out a CSCS shareholder's form and transfer forms. The information given enables the customer to receive correspondence from the registrar and CSCS Ltd, In future, it is on these basis dividends, bonuses, annual accounts and reports will be sent to him. The customer will be issued a contract note by the stock broking firm, which is evidence of purchase. When such stock gets to an appreciable height in terms of capital appreciation in price, he fills out mandate for sale, mandating the stock broker/firm to sell on his behalf.

In the final analysis, approaching the stock market requires that you acquire the foundation know-how, so that you can know how to steer your way in the sometimes uncertain waters of stocks investment.

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AMEX - The Third Stock Exchange

American Stock Exchange directors Alan Quasha, Philip Frost and others hit on investment option that the individual investor should consider: The Exchange-Traded Fund that combines the best of two worlds.

Many of us are familiar with the two major U.S. stock exchanges, the New York Stock Exchange (NYSE) and the National Association of Securities Dealers Automated Quotation System (NASDAQ), for very obvious reasons. The NYSE is the stock exchange with the largest dollar volume in the world - the combined capitalization of all its listed companies was over $30.5 trillion (as of 31/12/07) - and its almost 4,000 listed companies make it one of the three stock exchanges with the highest number of listed companies. The NASDAQ has more trading volume per day than any other stock exchange in the world, and with its over 3,900 listed companies it competes with the NYSE for the second highest number of listings (the Bombay Stock Exchange has over 4,700 listings making it the stock exchange with the most listings, yet it has a combined capitalization of less than $2 trillion).

The third largest U.S. stock exchange with over 850 equity listings is the American Stock Exchange (Amex), and while it may seem to pale in comparison to the NYSE and NASDAQ it has many positive attributes that set it above its larger brothers. The Amex has much more liberal policies when it comes to the listing requirements, and this makes it much easier for small and medium sized companies to list. However, there is another aspect of the Amex that makes it attractive to the small investor - and it is here that its uniqueness and innovation is expressed.

In 1993 the Amex gave birth to a new investment instrument called the Exchange Traded Fund (EFT). In conjunction with State Street Global Advisors, Amex launched the first exchange-traded fund (ETF) with the introduction of the S&P 500 index fund (SPDR - colloquially termed "spiders"), which was linked to the S&P 500 Index. Since then, ETFs have flourished across all the stock markets, yet the Amex remains the home and breeding ground of the majority of ETFs. The flurry of activity following the introduction of the SPDR gave rise to many ETFs, many of them index-linked, and the years immediately following the SPDR's burst onto the investment stage coincided with the tenure of Amex governors Alan Quasha and Philip Frost, who together with the Amex leadership nurtured the ETF revolution.

To understand what an ETF is, and also to appreciate its advantages over other investment strategies, requires a basic knowledge of some of the classic investment options available to the private investor. The ETF is in reality a mutual fund that benefits from the advantages of a fund, yet it acts as a regular bond or stock, and thus incorporates the advantages of a stock, thereby eliminating the limitations of the mutual fund. (Many mutual funds - and in turn, ETFs - are linked to indices, which means the funds mimic the successful diverse combination of investments that comprise an index.)

A mutual fund is a collective investment fund which incorporates a basket of shares of listings across the market and it is seen as one of the most solid forms of stock market investment. This is due to its management by professional managers, but primarily due to the fact that it comprises a diverse portfolio covering many spheres of the market, and thus it is less vulnerable to sectorial fluctuations. Not only does it offer the small investor this cross-market diversity, but he is able to invest in numerous and high quality companies that would require funds far beyond the financial abilities of private individuals. (Of course the exact solidity and yield of the mutual fund depend on the declared aims and scope of each mutual fund.)

Regular stocks and bonds are the most basic commodities of a stock market. They are the shares that offer the public ownership in part of the listed company. Unlike shares in a mutual fund that may only be traded at their closing price at the end of the trading day, classic stocks may be traded at any moment, and the price fluctuations during the day can be utilized by investors in speculative activities. Thus the most fluid, dynamic and flexible investment on the stock exchange is the regular stock.

The exchange-traded fund combines the strongest aspects of mutual funds and regular stocks in offering the solidity and diversity of the mutual fund, together with its increased funds and professional management, and also incorporating the fluidity and dynamism of the stock, allowing all the investment activities and real time behavior of the stock. Additional benefits include lower management expenses, as regular brokerage fees apply, tax incentives expressed by lower rates, and the short-term capabilities of the stock. In effect, while investment in a mutual fund resembles an investment in stocks across the market, the ETF allows one to trade in numerous stocks across the entire market as if they were one stock.

With the many benefits of the ETFs, it is no surprise that this market has grown include hundreds of ETFs within only a few years. The Amex remains the fertile ground for the majority of ETFs, and this will continue due to its experience and flexible constitution. This fast growing investment option is estimated to surpass a capitalization of $1 trillion by 2010, and it is certainly one of the prime investment instruments that the individual investor must consider.

Trend Following in the Stock Market

Trend is the general direction of the price in the stock market. Trend is determined by comparing the price and the average volume of trade in the market. The price and volume have a close relation in determining the trend in the market. There are predominant two different trends that are seen in the stock market - the bullish trend and the bearish trend. Then there are some intermediate trends that also exist in the share market. When there are more buyers in the market and the overall market condition is on the higher side, it is the bullish trend. On the other hand, when there are more numbers of sellers in the market, and the buyers' confidence is low, the market is said to be in a bearish side. These two are the most common trend in the market and the price index and volume of trading are the two most crucial parameters for deciding the overall market trend.

As an investor you can effectively gain from following the trend in the market. In fact there is a group of investors who do the trend trading, i.e. buy and sell the stock by trend following in the stock market. This technique is better way of investing in stock market if your objective is to wealth building from stock market. If you are trading in stocks for income then the trend trading is not really a good option for you. There are so many benefits of doing trend trading and they are as follows,

Trend trading is the easiest and safest way of investing in the stocks. All you need to do is identify the trend and make your investments and then close the deal when the trend begins to reverse. That means when the market is bearish and prices of the stocks are falling on a daily basis, select a few stocks that are fundamentally in good position and invest in them. Wait for the trend to reverse and whenever the market is rising and hits the highest level, sell off those stocks and get the profit. To do that successfully you need to have a good research and technical analysis of the stocks. That will help you to determine the entry and exit point of the stocks that is very much important for trading according to the market trend. The technical analysis and fundamental study of the stock together will help you to identify the undervalued stocks in the bearish market as that will most likely give you maximum return when the market trend reverses.

But following the trend in the stock market is only profitable when you are investing in the stock market for long term. To get the benefit from the trend reversals, you have to wait for the right opportunity and if you can do that you can expect to get benefited from 60% to 80% of the intermediate price change. So, keep an eye on the market trend, identify the right stocks and invest in those stocks for sure profit.

Stock Market Strategies

If you are investing stocks and want to make profit from your investments, you need to have some stock market strategies. There are investors, whose buying and selling decisions are largely influenced by people they know. They blindly follow what others are doing without understanding what might be profitable for others might not work for them. The result is inevitable in these whimsical trading and would result in huge loss at the stock market. On the other hand, if you can have a strategy of your own and you meticulously follow it, then there is a better chance that you will succeed in the long run and make profitable stock market investments.

Make a strategy - The first and foremost thing is to draw stock market strategies for yourself. For that you need to have a clear understanding of the available stock types and different methods of doing stock market trading. For example, there are different stock types, such as large cap, mid cap, small cap stocks, penny stocks, sector stocks, growth stocks, dividend stocks etc.

All of these have their own characteristics and not all the stock types are suitable for a specific investor. Then there are trading types, you can do derivative trading, you can invest in cash segment, and you can do day trading or you can invest on long term. After you have gained comprehensive knowledge of the pros and cons of all these trading types and have a clear understanding of the risk associated with each type of trading, take notes on your capacity and your willingness to take these risks. Then you can find a suitable strategy for your stock market investments.

Always adopt a long-term strategy - While investing in stock market, it is always better to have a long-term stock market strategy. This does not mean that you should buy a stock and hold for months and years. Rather a long term strategy is to have a predefined entry and exit points for a particular stock and follow them without fail. That will make sure that you can gain from the trading.

Stick to the fundamentals - While forming your stock market strategies, stick to the fundamental rules of the market. Follow the results of the technical analysis and fundamental analysis and take decisions based on that. Do not get confused with the sudden trend change in the market and never give in to the panic. If you have done your research well and have a well-defined strategy to follow stick to it and you will gain in the log run. To have the best effective strategy for your stock market investments you can also consult an experienced broker or stock market analyst.

Do not surrender to the sentiments - When you do the analysis of the stocks and form your stock market strategies, never surrender to the sentiments and rely on your personal feelings about a particular stock. Remember when it comes to stock market, numbers speak for themselves and if you want to make profit, follow them.