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Young and new to stock investing: Here are the key elements you should know

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Young and new to stock investing: Here are the key elements you should know

Elements are the ingredients and building blocks from which success germinates, and the practice of stock investing is a craft that requires the right elements and framework to enable the success of an investor on the stock market.

As a young and new investor, you might have heard of companies on the stock market like Dangote, Coca-Cola, Facebook, or MTN, these are publicly traded businesses that offer investors rewards in the form of stock price growth and dividends based on your stock ownership. This article is aimed at providing you with the key elements that are essential to stock investing.

Stock investing, like any other form of investing, is both a science and an art and the key elements of stock investing are knowledge, money, and patience. Read on to get a sense of why they are useful to an investor like yourself.

Knowledge

The first key element that anyone interested in investing in stocks needs is the knowledge of stock investing. Stock investing knowledge basically involves a set of principles and information needed for an investor to properly value and select the right stock that would guarantee a strong means of wealth creation for the investor. When it comes to stock investing the key things one should be familiar with are how to evaluate the Qualitatives and Quantitatives of a company’s stock.

The qualitatives are mainly those non-numeric features (i.e. what cannot be measured) associated with a company. In evaluating the qualitatives of a company’s stock, an investor should be primarily focused on 4 key things which include the business model, brand value, corporate structure, and competitive advantage of such stock. To put things into perspective let’s look at a brief case study of how to assess a company’s stock qualitatives using the example of Apple Inc. which is a $ 2.4 trillion American technology giant.

Apple Inc. Qualitatives

● In terms of its business model (i.e. how it makes money) Apple Inc. makes money by offering a wide range of products and services to its loyal customer base, some of which include the iPhone, iMac, and Apple Play Store service among others.

● In terms of its brand value (i.e. how consumers identify with its brand) Apple Inc. has a strong brand identity with regards to consumers. Many of its products and services are fanatically bought by consumers, which is good for its revenue base.

● In terms of its corporate structure (i.e. its corporate governance, management, and culture) Apple Inc. was founded by brilliant minds such as Steve Jobs and Steve Wozniak, and today it is run by Tim Cook who in the last 10 years of leadership, has taken the company from $28 billion in sales in 2011 to $81 billion in 2021. Apple is home to the best software and design engineers who operate in an environment that drives innovation which enables it to create products and services consumers always want and pay for.

● In terms of its competitive advantage (i.e. its edge in the market when compared to its competitor) Apple Inc. has a combination of innovation and brand equity attached to its hardware, software, and services, which it can charge a premium price for, way beyond what its competitors can charge. An Apple iPhone can cost a consumer $1000, but because of the innovation and brand value attached to that product, it still sells strongly against a functional Android phone that might cost $150.

The quantitatives on the other hand are those numeric features of a company (i.e. what can be measured) that give a sense of its health and working operations. Evaluating the quantitatives of a company’s stock requires a focus on key metrics and ratios which can be obtained by analyzing the financial statements of the company. Key metrics and ratios that should be assessed include the stock price, dividend yield, earnings per share, price to earnings ratio, book value per share, free cash flow per share, and debt to asset ratio.

To put things in perspective let’s look at another brief case study of the quantitative metrics and ratios you need to focus on, using the example of Guaranty Trust Holding Company PLC (GTCO), formerly known as Guaranty Trust Bank, an N840 billion Nigerian banking giant.

Guaranty Trust Holding Company (GTCO) Quantitatives

● In terms of its stock price (i.e. cost of the stock) GTCO has been priced at the highest, lowest, and average price of N57, N11.52, and N27 per share in the space of 10 years (i.e. 2011-2021). To put things in context, in today’s consumer market all GTCO prices over the years are less than the price of staple food like an egg which sells above N60 per egg today.

● In terms of its dividend yield (i.e. ratio of distributed profits to stock price), GTCO has offered investors an income yield from dividends of between 7-11% on each share owned by investors in the last 5 years (i.e. 2016-2020).

● In terms of its earnings per share (i.e. ratio of profits to total number shares in the stock market), GTCO has seen profit on each share grow from 4.67 per share in 2016 to 7.11 per share in 2020. That represents an earnings growth of 52.3% and speaks to the solid profitability and sustainability levels of the stock to investors.

● In terms of its price to earnings ratio (i.e. ratio of the price on each share to the profit gained from each share), GTCO has seen its earnings priced at an average factor of 4-7 within the years 2016-2020. That means on average over that period, the price paid has been between 4-7 times the profits made by the stock.

● In terms of its book value per share (i.e. ratio of shareholder value to the total number of shares in the stock market), GTCO has maintained shareholder value per share from a factor of 17 in 2016 to a factor of 27 in 2020, and what that means is that between 2016 to 2020, the company has grown its shareholder value by 59%.

● In terms of its free cash flow per share (i.e. ratio of excess cash flow to the total number of shares in the stock market), GTCO has maintained excess cash flow that has ranged from N202 million to N495 million between the years 2016 to 2020, and that shows a company that has a lot of liquidity to enhance the state of its business and value to investors.

● In terms of its debt to asset ratio (i.e. ratio of what the company owes to what it owns), GTCO has maintained debt levels below asset by a factor of 0.81- 0.84 within the years 2016 to 2020 and that means it has fair financial health with a debt that it sustains while it carries out its operations.

As you can see, having the right knowledge and framework when it comes to stock investing leads to better decisions, dividends, and profit levels for any investor and this is more so for any Millennial or GenZ who is ready to put in the work and effort when it comes to investing in stocks.

Money

After gaining the proper knowledge involved in stock investing, the next element you need as a stock investor is money. The reason money is important to the investor, whether beginner or experienced is that money enables the accumulation of large volumes of stocks, and it is the accumulation of large volumes of stock that enables wealth creation over time to the investor.

To elaborate on the importance of money and money allocation to an investor’s stock investing journey I would use the example of investing in United Bank for Africa (UBA).

UBA is a top banking and financial services company in Nigeria with a well-run framework from a stock investing perspective, and today it sells for about N7.5 per share (i.e. a price, less than one-third the price of an egg in Nigeria).

Let’s say you are flushed with cash, with N750,000 upfront you can buy 100,000 shares of UBA today, and with a dividend payout of N1 per share (i.e. 13% dividend yield) you can earn N100,000 every year without selling a single stock you own and this does not factor in the fact that dividend paid can increase yearly.

Let’s also consider that you don’t have the sum of N750,000 upfront to buy UBA stock all at once, this is where proper money allocation can come into place. Money allocation would require you to have a set plan, set amount, and set time to meet your investing objective. To get to 100,000 shares you can set a time frame of about 18 months and decided to allocate N40,000-N45,000 every month. Using this strategy would leave you vulnerable to market price fluctuations, but regardless of that fact, this strategy can enable you to meet your set objective.

Finally, when it comes to money it is important to note that the accumulation of shares in volume should be your objective, this is because the more volume one has, the more dividend in volume one can gain from.

Patience

Now that you have accumulated and are still accumulating more volume of share, the next element of stock investing you need to have is patience. The concept of patience is a key element in stock investing for the simple reason that investing in stocks requires the time and the compounding of accumulated volumes to achieve the objective of wealth creation on the stock market.

To elaborate further on the concept of patience to stock investing I would use the example of buying a UBA stock and being patient with the process after buying it. Let’s say you buy 100,000 UBA shares at N750,000 (i.e. N7.5 per share) and let’s also say that based on past performance that the UBA stock would pay a dividend of N1 per share all at a dividend and stock price growth rate of 15% and 10% respectively.

Using a dividend compounding calculator, if you are patient, allow your investment to compound, and also reinvest the dividend you earn every year, then the total value of your investment over 10 years will be N9.4 million, you will receive a total dividend worth N5.9 million and your shares would grow from 100,000 shares to 486,669 shares all at an annualized return of 28.86%. If you are not patient and don’t reinvest your annual dividend you will be left with your 100,000 shares at an annualized return of 19% and a total value of N4 million while receiving a total dividend of about N2.3 million over about 10 years.

It is also important to note that the more you invest and accumulate the volume of shares the higher the return levels you will get. Using the example and parameters above, if someone decides to invest N15 million to buy 2 million UBA shares and allows it to compound, the person’s investment would be worth N189 million in total value, the person would be paid a total dividend worth about N117 million and the person would see his or her shares grow from 2 million to 9.7 million shares in the space of 10 years.

As you can see the key elements of stock investing are too important to ignore for any serious and would-be investor. Using the information above and enhancing your understanding of the key elements of stock investing can therefore be a prized asset to any Millennial or GenZ interested in stock investing in Nigeria today.

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