The trend of stock trading has been steadily picking up throughout the world since the advent of electronic trading in 1970.
In the past decade, there has been increased participation of the millennials in the Stock market through online trading apps like Robinhood and E-Trade which has given boost to trading figures.
Nigeria too has seen growing interest in online trading with both millennials and older stock traders using local trading platforms.
But it has been noticed that many new traders generally tend to ignore the basics and risk factors related to trading while trying to book significant profits in turn they end up losing money. To make better profits, it is important to understand the details of the stock market and guidelines related to stock trading.
Below is our complete guide for the beginners to start stock trading in Nigeria.
What are Stocks or Shares?
A stock or share represents the ownership of the company or corporation. Owning shares of any company means that the shareholder owns a part of the company’s or corporation’s asset and earnings.
All the shares that are held by external investors of a company are called outstanding shares. Suppose if a company has 500,000 outstanding shares, then owning 50,000 shares means owning 10% of the stakes in the company.
Any company or corporation that exists in the world is either public or private. A private company is generally owned by a few individuals who can be founders, management, or private investors. A public company is a company in which common people or general public can own stakes besides the company promotors or founders – by buying a portion of shares offered in an initial public offering or through
For example, Aliko Dangote owns shares of Dangote Group, Elon Musk owns shares of Tesla. In simple terms, if you wish to own a part of any company, you will buy its shares.
The value of these shares keeps changing due to the performance of the company and many other factors. The frequent buying and selling of shares with an aim to book profit is called as stock trading.
How Does Stock Trading Work?
The act of buying and selling of shares from stock exchange with expectations to book profit is called stock trading while accumulating the stocks for a long term is called stock investing. Traders who generally buy and sell the stocks on the same day are known as day traders.
A Stock exchange is a secondary market where all major shares of public companies are traded.
Exchange matches the potential buyers and sellers of shares of listed companies on the exchange. This means that if you buy shares of any company, you are buying from other shareholders who want to sell through the stock exchange.
For example – Tesla, Microsoft, Alphabet, Guaranty Trust Bank Plc are traded publicly on stock markets and investors can buy & sell them on exchange.
Only Public Companies are allowed to trade publicly on a stock exchange that means outside investors or general public can invest in them through stock market. This is a way for companies to raise capital for business expansion or raise initial funding in case of IPO. Every new company has to register itself through Initial Public Offering (IPO) on an exchange.
Investors normally earn income from company’s profits as dividends or by speculation on share value as day trading or value investing in the stock exchange.
Individuals can buy and sell shares of any listed company at varying prices from the stock market.
Companies are not allowed to take part in stock trading but they can buy back their own shares or issue more stocks.
There are different stock exchanges across the world. Some countries have multiple exchanges like US has Nasdaq & Dow Jones. Nigeria only has one stock exchange i.e: NSE (Nigerian Stock Exchange). There are total of 169 companies listed on NSE which have a market capitalization of ₦29.5 trillion as of 8th September 2020.
How can you invest in shares of a company?
The stock exchange connects buyers and sellers who want to transact for the same stock. The broker acts as middlemen between the stock exchange and buyer or seller and charges a commission for executing trades. While owning the stocks of any company, the individual has stakes in that company which is listed on the stock exchange.
People in Nigeria can invest in any Nigerian public sector company and can also invest in stocks of
1. Buying Shares of Nigerian Companies on Nigerian Stock Exchange
To buy and sell shares of a public sector company listed on NSE, you need to open a stock trading account from an NSE registered dealing broker. The process is simple and can be completed within 48 hours by filling basic details and providing the required documents.
Apart from the stock trading account or the brokerage account, you also need to have a Central Securities Clearing System (CSCS) account. The CSCS holds the records of ownership of each security in Nigeria. The CSCS account opening form is provided by the broker which needs to be filled and submitted along with the supporting identity proof documents.
Once a CSCS account is opened, A Clearing House Number (CHN) is provided which is unique for each registered portfolio. After opening both the accounts and submitting the required documents, retail investors can start placing orders through the broker to execute stock trading.
2. Buying shares/stocks of Foreign Companies
As a share investor, you would like to invest in wide variety of leading companies. But the shares of foreign companies like Apple, Tesla, Microsoft, Google are not listed on NSE, so for this, you would normally need to open an account with a foreign broker like Robinhood, E-Trade but that’s not possible as most of these brokers don’t accept foreign clients.
However, several applications have been launched in recent years that allow traders in Nigeria to buy and sell stocks of foreign companies. Trove, Chaka, Bamboo, Wealth.ng, etc. are examples of the apps that allow foreign stock trading.
There also some forex brokers in Nigeria that offer CFD; Online Trading via their apps like Hotforex, ForexTime and some foreign CFD brokers like – Etoro, Avatrade, XM, Exness, IG that accept Nigerian clients. These brokers allow trading on foreign companies shares around the globe as CFD instruments and some even offer direct ownership of shares. However, it is important to note that CFD instruments have their risks and you don’t get ownership of shares.
Things to consider before trading shares online
For a convenient and safe trading experience, beginner traders in Nigeria should keep the following points in mind.
1. Risks and Risk Management
The stock market is uncertain and price fluctuations are completely random due to multiple reasons.
Each stock holds a different risk factor that must be analyzed and considered before executing the
The risk factor of the portfolio can be controlled by owning stocks of companies from different sectors.
The risk to reward ratio should also be checked before investing.
You should also learn about Risk management before investing – It is an act of identifying, controlling,
and mitigating possible risk elements. It could be achieved by using risk management tools offered by
brokers like Stock Loss.
2. Trading/Transaction Fees
A variety of stockbrokers are available in Nigeria and each of them charges different trading fees and commission. Before starting stock trading, it is important to understand about all the trading and non-trading fees that will be charged from the traders.
3. Information, Feeds and Data
The traders must have decent information about the stocks and should be able to compare every
available stock based on the available data. Traders can also create a goal-oriented strategy to trade based on the graphical data of previous price movements. Overvalued stocks should be avoided while undervalued stocks with possible upward movement should be preferred. This information is available as market feed and in data form at most brokers.
4. Investing Education and Following Others Advice
Traders should try to learn about the basics and strategies of investment before actually executing one.
Knowing the market trends, price swings, major news that can trigger price movement can play a crucial role in turning losing trades into profitable trades. Traders should not blindly follow others and should
use their own analysis to avoid severe losses.
5. Practice with Virtual/Demo Account
It is better to learn the basic terminologies and investment strategies through a demo trading account with virtual money. This will help you check the suitability of the selected stocks and investment strategy with your trading goals and objective without losing any money.