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One of the site commentators (Royal_Prince) asked a sincere question about how to judge the stock market; I was first taken aback by the question then I realize the pure sincerity associated with the question. So many workers rely on brokers to give them advice on where to position their funds in the Nigerian Stocks Exchange and deeper analysis of this trend reveals a worrisome future; you make some money by working 70% of the day and you are asking someone to decide how to manage the money. The hilarious joke about this trend is that the person you are asking to create this money for you may not be able to create this money for himself/herself. It’s like consulting the herbalist who cannot afford a decent consulting room and you see guys with hummer jeep asking for his/her advice. You are sure that you would be sacrificing something that herbalist himself /herself can never sacrifice to get to the position. 

Okay, enough of my riddles; it’s time for you to take your destiny into your hands. Just like your company demands milestones and KPI from you, demand the same thing for yourself. Take your time to learn how to create money. If the only way you know is doing your job well, then your future is shaky, no matter the job you have. It’s as if you saw a bullet coming and you jumped to the direction of the shot. Instead of receiving your remuneration and giving it to brokers to manage for you, why not just take your time to learn what the brokers know so your hard funds would not be used for their experiment. Please, kindly note that a brokers advice is very useful because he is always on the floor trading but note that he may not see what you are seeing especially in stock trading. Take his advice with your own knowledge and take a position. Even if it does not work out for you, you would have personally learnt one thing about stocks which nobody in this whole wide world can teach you – it is called experience (learning from mistakes you personally make). 

 Then if you do not have knowledge, how can you take a position. This is why I would take my time to go through the ABC of analyzing the stock market. What is a stock? This is the share of capital of a company held by an individual investor. What is the stock market? It is a standardized market place where these stocks are traded. Who is a stock broker? The individual that trades on your behalf in the stock market; you cannot trade in the stock market directly unless you are licensed to do so but you can instruct the stock broker to take a position for you. This means the stock broker cannot do anything with your funds unless you give a mandate. Now how do you know when to take a position (buy or sell a particular stock)? This I believe is where most people get perplexed and seek for the advice of their broker.    

To buy or sell in the stock market, there are so many things to consider but it comes down to two crucial elements; the Financial Technical Analysis and the Value Creation Index of the company. Why do you need these two elements? These elements would aid you in deciding if the stock price is undervalued or overvalued. If the stock price of a company is undervalued (the price is less than the actual value), you buy such stocks because you are sure it would rise to its actual value or if a stock is overvalued (the price is higher than the actual value), you sell because you are sure it would fall to its actual value. Let’s move to these elements and see how to use them; 

The Financial Technical Analysis involves the Profit After Tax (PAT) of the company per annum. You would need the PAT to decide the Earning Per Share (EPS) of the company. The EPS is calculated by dividing the PAT with the number of stocks the company has i.e. EPS is equal to PAT/Amount of Stocks. Let’s use an example so you can fully understand it, if a company declares an annual PAT of 5 billion naira and it has 10 billion shares that mean the EPS is 0.5 Naira/share. If I have 10thousand share in this company, I am theoretically the owner of 5 thousand naira but due to plough-back policy of the board and management, I may not get this particular sum that year. Now to know if a company is overvalued or not, there is the Price per Earning Ratio (PE Ratio) which tells you average turnover of the money invested. The Price is the quoted price in the stock exchange and the Earning is the EPS. If we use the example above and the quoted price today of the company is 20 naira, this means the PE ratio is 40 which simply translate to the fact that if you place your money in it you would recoup it back in 40 years. The quoted price is overvalued because it is too far from the EPS but if the quoted price is closer to the EPS, the quoted price is undervalued. 

Now an EPS can become diluted if a bonus share or additional share is declared making the EPS value lower than it should be. Most time when a bonus is declared by a company, the stock quoted price should fall accordingly or it becomes over valued so my dear, it’s time to sell it off. Please, kindly note that the smaller the PE ratio, the better is the stock so it’s great to buy but because of insider trading and book cooking, by companies who want to attract more investors, you may not rely on this analysis alone to make a judgment. The Value Creation Index comes in handy which is the intangible market value of the company. This can be judged intuitively by experiencing the company first hand. Value Creation (if you don’t know) is the activities a company engages in to create product/service. The Value Creation Index (VCI) is just a metrics for measuring these intangible drivers that affect the activities for creating these product or services. 

Now in doing my analysis, I use these nine drivers to aid my speculations in the stock market;   Innovation, Quality,  Customer relations,  Management Capabilities,  Alliances, Technology,  Brand value,  Employee relations, Environmental and community issues. If a company is constantly innovative in creating customer value and it has an excellent brand with great management capability but the PE ratio is large, I definitely would not by pass the company, I would have to investigate the company once more because something is definitely missing. One of my best stock buy was Access Bank since I was a staff of the company; I knew the stock market price at that time was undervalued because of the management capacity that took over, the reliable customer relation policy in place and the recent alliances. I did not need the financials of Dangote Sugar to invest in the IPO immensely because it enjoyed a monopoly product (brand value and quality) that was in high demand by various manufacturing company from brewery, juice and confectionaries. Since the owner of the company had other companies and would want to make an impression with his first company in the stock market, I was sure it would do everything in its power to make it worthwhile. Barely three months, Dangote Sugar declared One naira for every share and 3 months after its first dividend, declared another dividend.    

I try my best not to tell people to buy this stock or buy that stock because I don’t believe in giving you fish but teaching you how to fish so you won’t need to ask me periodically when you need to place a position. If you work so hard on your job why not take time to study the equity market especially stocks so you can know how to make money by yourself. I am really not a fan of the stock market because it hinders leverage though I have my portfolios diverted into it . I got to go to bed now, I have been up all night; hope I have been able to partially answer your questions? If I have not, I would try to answer the questions on the comment section. May be I should declare a free seminar on stocks? You never know…………….