Understanding Stock Market Behaviour: Lesson 101

Understanding the mechanism of the stock market is key to appreciating the fluctuating movements that make money for market participants. The equity market's upward and downward drift is responsible for the gains and losses you see happening at the close of trading for the day.

What could be responsible for this movement? What causes a stock price to rise or fall? What is news trading? What are the technical factors that influence the price of stock? Is the price of a stock completely controlled by both fundamental (news) and technical factors, or just one of them?

When do you think it is the right time to buy a stock? In what ways can a stock make money for investors?

I believe these are some of the questions newbies ask when considering investing in the stock market.

Before making any advancement in trying to identify profit-making opportunities in the stock market, it is important to have a clear picture of what investing in the Nigerian stock market is all about.

What is the Nigerian capital market like?

The Nigerian capital market, in simple terms, is a financial market where middle-term and long-term financial assets are bought and sold. It is also a financial market where long-term debts and equities (stocks) are bought and sold.

It is a place where companies quoted on a legally backed exchange raise money to back up their business operations through equity and debt financing.

For the ordinary man, it is a place where you try to make money by owning a part of the company. Owning a part of the company through shares makes you a part owner, and you are entitled to make money through dividend payments, which is a reward the company's management pays its shareholders for being a part-owner.

The shareholder can also make money through capital appreciation, i.e., when the price of a stock moves higher to the point when you can sell a stock at a higher price.

In Nigeria, the capital markets that are popularly known are the Nigerian Stock Exchange, managed by the NGX Group, and the FMDQ OTC, which are both regulated by the Security and Exchange Commission (SEC).

The Nigerian capital market consists of two categories, namely the primary market and the secondary market.

While the primary market is for a new issue market, or what people call the initial public offering (IPO), the primary market deals solely with the issue of new securities.

It is a place where trading in securities is done for the first time. For example, the just concluded retail IPO of 575 million shares of MTN Nigeria. If you were fortunate enough to get it, congratulations. You have just become an investor in MTN Nigeria and a market participant on the Nigerian Stock Exchange.

In this, you make money through dividend payments that come after certain conditions or periods of time have elapsed.

The other is the secondary market. which is a market where trading takes place for existing securities. These are stocks that are already traded on the stock market.

Stockbrokers buy and sell them on behalf of their clients. This market is what some people call the real stock exchange or the stock market.

Who are the key participants that you must familiarize yourself with when trading in the equity market, be it the primary market or the secondary market?

They are the Securities and Exchange Commission (regulatory), the Nigerian Stock Exchange, stockbrokers, trustees, issuing houses, and registrars.

In the primary equity market, you only make money when the company pays dividends. Dividends are rewards given to shareholders for holding a unit of capital in a firm.

While in the secondary market, you make money basically through price appreciation and dividend payments.

Gains or losses in the market are largely determined by price movements, what they call "market force." That is, the price of a stock is influenced by the forces of demand and supply.

In simple economics, if demand for a stock exceeds supply, the price will increase. Let's say a company is trending in the news for the right reasons.

There is a great tendency that its stock price will react positively as traders will want to get a piece of the action. As a result, the price will rise, thereby making a profit for holders of the stock.

That news can be caused by news of merger or acquisition, a retail shareholder increasing his/her equity ownership of a company (Femi Otetola with FBNH), earnings forecast of some directors of the company, rumors of earnings per share (EPS), released financial reports, legal battles of a company (Ecobank and Honeywell Flourmill), ailment or sickness of an important member of the board of directors, the introduction of a new product or deal that can affect the future profit of a company, insider trading even though this is illegal, or a funny event that all of a company's IPO.

Don’t bother about the technicalities because you won’t be able to make much sense of the line graph from a stock table.

Unlike in foreign stock markets where you can analyze the behavior of stocks by just looking at the candlestick chart, the candlestick carries more information about a stock market than the line graph, which only gives you the closing price for a time period of a day.

Apparently, the top gainer stock for the previous week was PHARMDEX, which made a whopping 10% gain to its price listing as it closed at NGN2.20K on Friday after opening trade at NGN2.00K in the morning. Assume you own 50,000 shares of this company. You could have made far more money if you bought the shares at, let's say, NGN1.15K when they were sold at that price early this year.

For a clearer picture, you bought 50,000 units for NGN57,500 when it traded at NGN1.15K per unit of shares. Now that it is trading at NGN2.20, you are likely to make NGN52,500 in addition to your stock portfolio.

Consequently, livestock, with a loss of -10.00%, made the biggest loss for the previous week.

For this week, we look closely at ACCESS because of their conversion into a holding company, FBNH, ZENITHBNK, MTN, and AIRTELAFRI.

Finally, this series will continue every week.