The Basics of the Stock Market

A Beginner’s Guide; The Evolution of the Nigerian Stock Market and the Key Players in the Nigerian Stock Market Ecosystem.


Imagine you have a friend who’s trying to host a party at his house… You know what? Scratch that! Let’s make it more personal and say you’re that friend who wants to host parties at your house to make people happy and maybe earn some extra money.

You’ve hosted a few parties, and they were great. You made a lot of money. But you’ve been to other parties hosted by your friends, and you know you could do better. You’ve done some surveys and realized that most of your party guests enjoy having pools to swim in with the ladies. And you’ve noticed that your DJ skills aren’t really doing it for the dance floors. So, you decide, “I’m going to get people to invest in my business.”

The Basics of the Stock Market


The stock market is a collection of markets, online or physical, where stocks or shares, or pieces of ownership in businesses are bought and sold. Going back to our story, the stock in this scenario is a special ticket you sell to people who like your party idea. If you make 100 of these tickets and each sell for $100 (N154,546), an individual who buys one ticket would own 1% of your party. If they buy ten tickets, they’ll own 10%.

The main function of the stock market is to facilitate the exchange of financial assets or securities, like stocks and their derivatives, between buyers and sellers. This provides a marketplace, either online or physical.

How Does the Stock Market Work?

Your party is running as usual. You’ve created your special tickets and introduced your party plans and financial goals to the public. You literally threw a party for everyone to sell this idea to them, and the entire crowd roared in excitement when you were done with your proposal.

Now, there are questions we need to answer. Why was the crowd excited? What did they have to gain? Were they going to make money from buying the special tickets? If so, how?

Understanding Stock Exchanges

For those of you who didn’t see the popular movie “The Wolf of Wall Street” until you realized that there was a lot of money to be made in the stock market, and for the rest of you who haven’t had that realization yet or just aren’t into movies—either way, it’s very illustrative of the stock market. There are risks, there are crooks and there is massive profit. Everyone is trying to make a little more money.

To buy or sell stock, you need to go through a middleman or broker. Before the internet, you had to call stock exchange organizations like the New York Stock Exchange (NYSE) in the USA or the Nigerian Exchange Group (NGX) in Nigeria. But these days, with the help of the internet, you just need to go to sites like Robinhood or Bamboo, depending on your country, and pick an organization you’d like to invest in. You can then buy or sell shares.

Stock Prices

Trading stock is risky because stock market prices are in constant flux. Based on the supply and demand principle, you could potentially gain a profit or lose money. To mitigate this risk, as a stock trader or potential trader, you can study factors influencing demand and supply. These factors include company performance, economic indicators, and market sentiment.

Navigating Buying and Selling Stocks

Just like in a regular marketplace, investors can buy stocks directly through brokers or trading platforms like Robinhood and Bamboo. Shares can be bought or sold at the market price or through “limit orders”, which execute trades at a specific price.

Understanding how Profits are made: Dividends and Capital Gains

This is why everyone got excited at the party when you introduced your company to them. This is where they profit. When your project to expand your party is complete, and you’ve hired a popular DJ, no one wants to leave your party because it’s on 24/7. As a result, profits are being made in your business like never before. You’re expected by law to compensate your workers. Additionally, you’re required to give your investors a portion of your establishment’s profit, depending on the shares they bought. This is called a dividend.

You can also make money in the stock trade business by taking advantage of the increase in stock prices, which is directly proportional to the increase in demand. When everyone wants to buy your stock, maybe because you’re making a lot of profits or the media is saying great things about you, or your business is expanding, people will start buying more of your stock due to the increased demand for your products and services.

Let’s say I saw potential in your business and decided to buy two stocks for $100 each at that party. Five months later, you increase the price per stock to $150. That would be a massive capital gain of $50 for me if I decided to sell during that demand period. Now imagine doing this for more than one company every day. By the end of the year, if you’re diligent, alert, and patient enough, you could be making thousands, if not millions, of dollars.

The Evolution of the Nigerian Stock Market

The Birth of the Nigerian Stock Market

The Nigerian stock market’s roots trace back to the establishment of the Lagos Stock Exchange in 1960. They started operations in June 1961 in the Central Bank building on Lagos Island. In 1961, Nigeria had only just gained independence, so the stock exchange market had four major dealers: Inlaks, John Holt, C.T. Bowring, and Investment Company of Nigeria (ICON). They dealt mostly in government securities and very few private ones.

Growth and Expansion

In 1977, the new governing bodies were making plans to improve the stock market. By the end of the year, changes were made, especially to the name from “Lagos Stock Exchange” to “Nigerian Stock Exchange.” Instead of just one location in Lagos, several branches were erected in major commercial cities like Abeokuta, Bauchi, Benin, Ibadan, Ilorin, Kano, Owerri, Onitsha, Uyo, Yola, and Port Harcourt. By 1980, there were more listings than just government securities. This was around the same time that the famous Dangote started his career as a successful businessman. Four years later, the All-Share Index was launched, reaching a mark of 100 points with 98 listed securities in 1992 and 10,000 points by 2000. Today, July 2024, there are 154 security listings on the Nigerian All Share Index (NGX All Share Index), with the current market value at approximately 99,217.60 points.

Modernization and Digital Transformation

With all that growth and expansion, the introduction of regulatory frameworks was expedient. In the 1990s, the federal government made regulatory laws to regulate both foreign and local trade, ensuring the integrity of the Nigerian stock market. The 21st century brought technological advancements and modernization to the Nigerian stock market. The introduction of electronic trading systems in the early 2000s improved the market, making it more efficient and accessible. By 2013, the NSE was demutualized, transitioning from a mutual organization owned by its members (stockbrokers) into a for-profit shareholder-owned corporation. This development led to another name change, from Nigerian Stock Exchange (NSE) to Nigerian Exchange Group (NGX), making it a more dynamic and competitive entity.

Key Players in the Nigerian Stock Market Ecosystem

The Nigerian Exchange Group (NGX)

As the primary stock exchange in Nigeria, the NGX provides a platform for trading equities, bonds, and other securities. It plays a crucial role in maintaining the integrity and transparency of the stock market.

Securities and Exchange Commission (SEC)

The SEC is the regulatory body overseeing the Nigerian stock market. It ensures that market rules are not broken and prevents unfair trading practices and manipulation.

Central Securities Clearing System (CSCS)

The CSCS facilitates the clearing and settlement of transactions in the Nigerian stock market. It ensures the smooth transfer of securities between buyers and sellers, enhancing market liquidity.

Stockbrokers and Brokerage Firms

Stockbrokers act as intermediaries between investors and the stock market. They provide services like trade execution, investment advice, and portfolio management. Prominent brokerage firms in Nigeria include IBTC Stockbrokers, CSL Stockbrokers, and Meristem Securities.

Institutional Investors

Institutional investors, such as pension funds, mutual funds, and insurance companies, play an important role in the Nigerian stock market. They provide substantial capital and contribute to market stability.

Retail Investors/Entrepreneurs

Retail investors, including individual traders and small-scale working-class investors, are also vital to the stock market’s growth in Nigeria. Initiatives to boost financial literacy and market participation have led to an increase in retail investor activity. There are two main types of retail investors: active investors and passive investors.

summary

Understanding the basics of the stock exchange is essential for anyone looking to invest or gain insights into the financial world. The Nigerian stock market has a rich history and an evolving landscape. While there are challenges, there are numerous opportunities too. For example, if you made an investment in the Nigerian All Share Index (NASI) of one hundred thousand Naira (N100,000) and left it there, that money would have grown to approximately N1,240,220 by July 2024, based on the Compound Annual Growth Rate (CAGR) of 11.06%. This illustrates the benefits of investing in the stock market.

No matter the extent to which the market value falls and rises, as a passive investor investing in index funds like the S&P 500 in the US and the NASI in Nigeria, the risk of losing money is reduced. Financial freedom means being brave in the face of economic uncertainty and making investments for your future. History teaches us that the stock market always bounces back, so invest in it today.