This is the second article in a series on investing in the Nigerian Stock Exchange (NSE). Here is the link to the first article, which is about picking a stockbroker.
So you’ve opened a brokerage account, and now want to start investing. What stock should you buy?
Here are several factors to consider, when picking a stock.
Management is the biggest factor to consider when buying a stock. Is the management experienced? Are they prudent when it comes to decision making ?
Is the management centred around one person? That’s known as key man risk. If something happens to that person, maybe death or an exit, the company could stumble.
Does the management adhere to the highest levels of corporate governance?
What kind of market are they operating in ? Are they the dominant player? Can they set prices? Are there many players in the industry ? Is the industry a duopoly?
A company that is a dominant player or one in an industry where there are very few operators, could be a could stock pick?
Long and consistent dividend history is a key factor to consider when picking a stock. While capital appreciation is key, price movement can often be volatile. Regular dividend payment is thus a very good cushion in bear markets.
Are they affected by an FX swing ?
Nigeria’s economy is largely dependent on foreign exchange for a variety of reasons. As a key source of government revenue, and for importing finished goods and raw materials.
Exchange rate swings in Nigeria, tend to be sudden and sharp. Some stocks such as banks and firms with a lot of export activities tend to benefit. Others such as those involved in producing consumer goods tend to benefit.
How have the firms reacted to past swings? Did they make money or lose money. You can look at past annual reports.
Listed companies are mandated by law to provide quarterly reports and announce any key changes. Some companies are prompt with reporting. Others are notoriously late.
Do your leg work
Before investing in any stock, do your leg work. Talk to professionals in the industry. Especially their competitors. Competitors tend to give an unbiased assessment.
Visit the company if you can. If it is a consumer goods firm, talk to the middlemen and women. What goods are selling in the market?
Listen to investor calls, and attend company events.
This is not an exhaustive list, as our next article we cover the key numbers to look at when analyzing a financial statement.