The difference between a rich person and a poor person is that person’s
vocabulary. All a person needs to do to become richer is increase his or her
financial vocabulary. And the best news is; most words are free.
--Robert Kiyosaki.
I have had quite a number of people asking me what a bear is or what a bull is, typically wondering what these wild animals have to do with the stock exchange. And although Robert Kiyosaki has been strongly derogated around the internet, I still find some of his writings vital tools in driving home my point. One such tool is his believe in the power of one’s vocabulary. I mean, he was bang on the spot when he wrote:
In school, lawyers learn the vocabulary of law, medical doctors learn the vocabulary of medicine, and teachers learn the vocabulary of teachers. If a person leaves school without learning the vocabulary of investing, finance, money, accounting, corporate law, taxation, it is difficult to feel comfortable as an investor.
You will agree that a new subject will come to you as an unfamiliar foreign language if you have not acquired any familiarity with the words which define it. Investing is no different. So I have included here some of the most commonly used words relative to the Nigerian Stock Exchange with the hope that it will aid in setting you on the path to full comprehension of the innards of the stock market. This still requires further research on your part as the words are in no wise comprehensive.
Share/Stock
This is created when a company divides itself into small bits and sells each bit to investors at a specified price. Investors are however allowed to buy as many bits as they can (as per financial capability) or want (as per discretional decision). (Much like cutting a circular birthday cake into several cone-like parts at a party, and “selling” each part, instead of distributing them, to the participants present at the party. Only this time you can “eat/keep” as much as you can). This illustration, as simple as it may seem, might be very important as Warren Buffett (the world’s richest investor) is of the opinion that; when shares are viewed as tangible “parts” of a business, an investor acquires a deeper understanding of his portfolio and his mode of investing adjusts noticeably in a positive direction. After owning stocks (read ‘part’) of a company, you become entitled to share in its profit, losses and assets.
The Nigerian Stock Exchange
Usually an exchange is a place in which stocks, bonds etc (generally called securities) are traded i.e. bought and sold. The Nigerian Stock Exchange is just one of such. Other examples are the Tokyo Stock Exchange, the London Stock Exchange, and NASDAQ. Because of the definite quantity of shares available, there is room for fluctuations in price due to the forces of demand and supply (Adam Smith’s Invisible Hands). In fact, it is a market place where securities are sold, thus it is often called the Nigerian Stock Market.
A Stock Broker
As a rule it is unacceptable for anyone to sell or buy stocks/shares by himself without proper authorization. This is where a broker comes in. A Stock Broker is a person authorized to buy or sell securities for you in exchange for a fee, referred to as “commission”. To be able to buy and sell stocks yourself in Nigeria, you will have to go through the Chartered Institute of Stock Brokers.
Sector
When you open a stock listing page in a financial newspaper, you usually find that the companies are presented in groups called industries or “sectors”. Thus a sector is a group of stocks that are in relatively the same businesses. Some sectors in the Nigerian Stock Exchange include but are not limited to: Food, Beverages and Tobacco, Breweries, Construction, Leasing, Maritime, Printing and Publishing, Health, Transportation et cetera. I purposely avoided the more popular banking and insurance in an attempt to “open your eyes” to the other sectors available.
Initial Public Offering
An Initial Public Offering is simply when a company sells stocks of itself for the FIRST time. Any other sale is referred to as just Public Offering e.g. the present First Bank public offer. A Right Issue on the other hand is the sale of newly created shares to existing shareholders of a particular company
Market Capitalization
The Market Capitalization of a company gives an idea of the amount you would have to pay if you bought all the shares of a company at a particular point in time. It is a derived figure gotten by multiplying the price of a company’s stock at a moment in time by the total number of outstanding shares in issue of that company.
The Bulls
This is a financial slang for a conspicuous rise in stock prices. So when the stock market is generally characterized by a rise in stock prices it is referred to as a Bull market. It is also used in describing a positive adjustment in the prices of the most capitalized stocks on the exchange. It is the opposite of the Bears.
The Bears
This is a financial slang for a conspicuous fall in stock prices. In essence a Bear market is one plagued by gravity sensitive stocks. It usually brings with it depression and alarm from “bad” investors who are foolish enough to react to the emotions or sentimentality of the market.
I thought it amusing to share a humorous saying which goes: “While the Bulls go climb up the stairs, the Bears go out the window”. It is used to describe the painfully slow ascension of stock prices (in bull markets) and the seemingly accelerated rate at which they fall in bear markets.
All Share Index
An index generically, is a benchmark which is used as a reference marker to which financial performance is measured. The All Share Index is the benchmark for the performance of the Nigerian Stock Exchange. Other notable indexes are the Nikkei Dow Index and the Dow Jones Index. At a particular point in time, an index can give an idea as to whether the market is bullish or bearish. For example, the All Share Index has had an unprecedented upward movement from 34,450.45 as at 10th January, 2007 to 51,383.64 as at today 4th June, 2007. So we can say that in that time frame the Nigerian Stock Exchange was bullish. But it is believed that in the long run (which actually means decades), the index moves upwards.
Dividends
This is a portion of a company’s profit paid out to investors relative to their holding in the company. In Nigeria dividends are usually paid annually, but with Dangote Sugar Refinery plc pioneering quarterly payments, in no distant time other companies might do just that.
Bonus Issue or Scrip
Scrip is the issuance of newly created shares to existing shareholders, by a company, essentially relative to their present holding at that point in time. It is free and at the mercy of the benevolence of the company’s board of directors. Actually the company does not create the shares out of thin air, it actually funds it from reserves set aside by a process called “Appropriation” of the profit it has made after tax.
I really would love to continue but it is already beginning to look too long. So that’s all for now. If you are interested (I think you should be, I strongly urge you to, anyway) in learning more about Appropriation and similar financial concepts visit the EntrepreNoir’s Library on the side bar and study the article: Analyzing an Income Statement.
Happy researching.
Awaken the EntrepreNoir Within; promoting financial literacy one article at a time…
