wnership is a crucial component of wealth growth, and it is something that everyone should strive for today. Regardless of one’s age, ownership implies a person’s ability and right to hold anything that can offer financial security and wealth. It can take numerous forms, including property, a business venture, precious stones, and financial instruments like bonds, treasury bills, and stocks.
It is critical for anyone over the age of 16 who was born during the Millennial (1981–1996) or Gen Z (1997–2012) generations to take ownership seriously and adopt it early, regardless of their income level. This article seeks to clarify and provide a framework for understanding the concept of stock ownership, as well as how to value and choose equities on the Nigerian Stock Exchange today.
Why should you buy and hold stocks?
A stock sometimes referred to as a share, is a fraction of a firm that is owned by an individual, group, or corporation. Stocks are traded locally on the Nigerian Exchange Group (NGX) and internationally on the NYSE (New York Stock Exchange) , NASDAQ (National Association Of Securities Dealers Automated Quotations) and LSE (London Stock Exchange). Individuals like you and me who want to acquire stocks can do so through a stock brokerage firm, which today has several physical and online locations.
A stock owner is entitled to a percentage of a company’s assets and income based on the number of shares owned. Purchasing and owning a stock can be extremely advantageous, allowing the stock owner to compound and build wealth. The Chairman of Zenith Bank Plc, Jim Ovia, owns 2 billion Zenith Bank stock, which is an example of amassed wealth through stock ownership in Nigeria. Zenith Bank has paid its shareholders a dividend of N2.5 per share (i.e. a share of profit) every year for the last five years, resulting in a profit of $25 billion for Jim Ovia in the last five years without selling a single share he owns.
It is necessary to have the capacity and experience to properly appraise and select the right stock when it comes to owning a company’s stock profitably and sustainably. A combination of qualitative and quantitative analysis is the most efficient technique to appraise and pick companies. The following part will show you how to conduct these assessments properly so that you can own the right stock in Nigeria or anywhere else on the planet.
Qualitative evaluation of a stock
The evaluation of qualitative information [ that is, Qualitatives] of a corporation is what qualitative evaluation/analysis of a stock entails. When it comes to a company’s stock, we describe qualitatives as the non-numerical data that allows a stock investor to gain a good feel of the nature and value of the stock they want to buy. Business model, brand value, corporate structure, and competitive advantage are the primary qualitatives of a firm that should be examined. What you need to know about qualitative evaluation is as follows:
- Business Model: A company’s business model is essentially how it produces money and makes a profit from the items or services it provides to customers. When studying a stock, it is critical to understand how the company makes money, what products or services it sells, and whether or not customers pay for them. Consider a bank, such as First Bank or Union Bank, whose fundamental business model entails collecting client deposits and lending those deposits to businesses at a profit. Avoid any firm stock that lacks a defined business concept.
- Brand Value: A company’s image and identity, as well as how consumers perceive them, are represented by its brand value. When conducting qualitative evaluation, it is critical to find and select a stock that reflects the entire firm as well as valuable and in-demand items or services. MTN, Apple, Coca-Cola, Zenith Bank, and other corporations with strong brands are examples.
- Corporate Structure: When evaluating a company’s corporate structure, pay attention to the company’s governance, management, and culture. A business should be run and managed by individuals with the necessary competence, in an atmosphere that can and should provide consistent profitability. If a technology company, such as Google, is run by a seamstress, as an investor, you should be wary of such an investment.
- Competitive Advantage: The competitive advantage is a crucial qualitative since it reveals the company’s competitive advantage over its competitors. When choosing a stock, you want one with a large and comfortable market share, such as Dangote Cement’s dominance of the Nigerian cement sector. This allows the corporation to control the majority of the earnings in the cement industry, which is excellent for investors.
Quantitative evaluation of a stock
The evaluation of quantitative information (that is, Quantitatives) included in a company’s financial statements is called quantitative evaluation of a stock. Quantitatives are primarily in the form of numbers and metrics, and the capacity to assess fundamental sections of a company’s financial statement, such as the balance sheet, income statement, and cash flow statement, is required for proper execution of quantitative evaluation.
Quantitative evaluation’s purpose is to break down a company’s financial statements into key measures that can assist you assess a stock’s health and profitability. While this task may be difficult for someone who does not have a background in finance or accounting, it is nonetheless simple to comprehend. The following are the important quantitatives you should pay attention to:
- Stock Price: A stock’s price, often known as the share price, is the cost of purchasing a single stock. When buying a stock, the stock price is usually the first key factor to examine, but it must be weighed against other important factors listed below. When picking a stock, look for one with reasonable prices that are not overvalued in relation to earnings, book value, or assets.
- Dividend Yield: When a stock’s price is compared to its dividend yield, the dividend yield is the amount of profit provided to the stock’s owner. As a stock owner, your major goal should be to prioritize equities that can give you a lot of dividends while also giving you a good yield, which will justify why you bought them in the first place. Zenith Bank, a dividend-paying company on the NSE, has given a yield of 10-13 percent to investors every year for the past five years.
- Earnings Per Share (EPS): The earnings per share of a stock shows the profits connected with that stock for each outstanding share in a given year (that is, all company stocks made public). When picking a stock, it is critical that it is lucrative and has been profitable for a long time; otherwise, there is no purpose in holding it in the first place.
- Price to Earnings Ratio: The price to earnings ratio shows how much you have to pay for each earnings per share of a stock you want to buy. When purchasing a stock, it is rational to select one that strikes the correct balance between the firm’s market price and the earnings it generates per share. As a stock owner, your job is to avoid pricey stocks that are overvalued in relation to their earnings and instead look for undervalued and underpriced stocks that will give you the best return on investment.
- Book Value Per Share (BVPS): The book value per share (BVPS) shows a stock’s genuine value. After liabilities and debt have been subtracted from assets, the book value is what is left. As a stock owner, it is critical to identify and choose stocks with high book value, as this represents a stock’s true worth once obligations and debt are factored out.
- Free Cash Flow Per Share: Cash flow is the heart of any business, so a company that cannot generate enough of it will inevitably fold up. As a stock investor, your goal should be to value and choose firms that have a lot of free cash flow, not just cash flow. After capital expenditures such as equipment and property have been deducted, free cash flow is the remaining cash flow. A stock that consistently generates enough free cash flow is healthy and deserves your money.
- Debt to Asset Ratio: When it comes to stock ownership, one of the most important things to remember is that a company’s debt should never exceed its assets. A stock’s debt to asset ratio displays how much debt it has in comparison to its assets. As a general guideline, the stocks you should own should have a ratio of less than one, and any stock with a high debt-to-asset ratio should be avoided.
As a Millennial or Gen Z, you now have a simple framework/clear foundation from which you may correctly appraise and select stocks using the information above. When analyzing a stock you want to acquire, it is critical to use a bottom-up strategy and make sure you compare the stock to its historical data, competition data, and economic data.
Stock ownership is an important aspect of building wealth, and the information provided above will help you get started on your path to riches on the stock market today.