GFA Opinion

Is The Stock Market Building Wealth? 

The general idea behind purchasing shares and stocks is to invest in order to generate a long-term return on investment (ROI) and gradually build wealth. Recently, a story about a lady who bought shares in a certain company and sold them at a much lower price after a few years circulated in the media, and most people were puzzled as to why that happened. Some people did not even understand what the stock market really involved as well. 

In this article, we will go over what shares are and how purchasing shares works, and then discuss some of the plausible causes for the failed stock investment mentioned above.  

For a person who is not so versed in the concept of shares and the stock market, here’s a quick break down. 

What Are Shares?

Shares are units that represent equity ownership in a corporation or financial asset and therefore are owned by investors who exchange capital for these units.  

When you own stock in a company, you are called a shareholder. Shareholders are entitled to any profits earned by the company in the form of dividends and are also the bearers of any losses incurred by the company.  

Public companies sell their shares on a stock exchange, which keeps track of the demand and supply for each company’s stock, which has a direct effect on the stock’s price. 

Stock Exchange

The stock market also known as equity market or share market is the aggregation of the shares of people both the buyers and sellers. The stock or share represents ownership claims of the buyers, known as (shareholders or stockholders) in a company. 

A stock exchange is a market where securities like stocks and bonds are freely traded in accordance with well-defined standards and procedures. A stock exchange is an exchange (or bourse) where stockbrokers and traders can buy and sell shares (equity stock), bonds, and other securities. Many large companies have their stocks listed on a stock exchange. This makes the stock more liquid and thus more attractive to many investors. The exchange may also act as a guarantor of settlement. These and other stocks may also be traded “over the counter” (OTC), that is, through a dealer. Some large companies will have their stock listed on more than one exchange in different countries to attract international investors. 

By providing a common platform for exchange, the stock exchange assists in capital development and serve as a bridge between companies and investors. Companies can raise funds on stock exchanges, and investors can make informed judgments based on factual trade data. A physical location or an electronic trading platform can be used for these exchanges; many people are currently tilting towards electronic trading. 

Purchasing Shares

Shares are units of ownership in a company, and when you buy a share, you become a part owner of the company and would eventually get a corresponding share of the company’s profits (dividends) when they are disbursed to its shareholders.  

These shares also typically permit you to vote on board of directors’ members and other critical issues depending on the size of your shareholding and whether it is ordinary or preferred shares. 

  • Ordinary shares: otherwise known as equity shares is the most common type of shares issued by a public company to raise capital. Holders of these shares receive dividend pay-outs and the right to vote in the election of board members. The pay-out on equity shares is not fixed and will fluctuate depending on the amount of available profit for dividend distribution. 
  • Preference shares: These are the shares of a company’s stocks that are paid to shareholders before ordinary stock dividends are disbursed. The dividends of these shareholders are mostly fixed, and they do not own any voting rights. These shareholders are also entitled to get paid first when the company goes bankrupt. 

Consider this a brief introduction to the idea. 

The purpose of a stock exchange is to facilitate the exchange of securities between buyers and sellers, thus providing a marketplace. The exchanges provide real-time trading information on the listed securities, facilitating price discovery. Buying company shares is one of the best and most straightforward ways to build wealth. Through shares, you become a shareholder, owning a piece of the company. Buying stocks through exchange-traded funds is a transparent and risk-free form of investment 

The more time you’re invested in the market, the more opportunity there is for your investments to go up. The best companies tend to increase their profits over time, and investors reward these greater earnings with a higher stock price. That higher price translates into a return for investors who own the stock. 

Can Investments Go Wrong? 

The answer to this question, in theory at least, is pretty straightforward: Yes. 

Stocks can lose all their value in the market, and have done so before, especially in the case of a bankruptcy. Even if a company does go bankrupt, shareholders often receive some residual payment back, but this is usually just pennies on the dollar. This fact should not scare you off from investing in stocks or investing in general. However, we would be lying if we claimed that stocks carry no risk (although some, of course, carry more than others).  

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The Stock Market In Nigeria

The Nigerian capital market came into being when the Nigeria Stock Exchange (NSE) was established in 1961. It was established to provide an avenue for making the savings of investors available to companies and corporations via stocks and shares. 

The Nigerian capital market, since its establishment, has contributed significantly to the growth of Nigeria’s economy. It is on record that 85% of total corporate tax comes from organizations listed in the Nigerian stock market. 

Despite the positive feedback from some sectors of the economy, the Nigerian capital market has not been able to effectively mobilize capital for the development of some vital sectors of the Nigerian economy. 

This is one of the many problems faced by the Nigerian capital market. The falling oil prices have also led to the withdrawal of a lot of investors. A lot of investments ended up in losses, which contributed to dampening the confidence of individuals.

The NSE factbook of 2010/2011 puts the number of individual investors in the stock market at 3 million. Considering the fact that Nigeria is a country with over 150 million inhabitants, this is quite poor. The reason for the low participation is the unsavoury testimonies of former individual investors, which has led to serious doubts about the credibility of the Nigerian capital market. 

Is the Nigerian stock market building wealth? Are people earning from the stock market? Or are people losing more than earning? 

“Stock market investors are set to enjoy a 47.1 per cent YoY increase in dividend earnings to N1.1 trillion for the financial year ended 2021, up from N732.9 billion the preceding year 2020. 

The Return on Investment, Roi, which outperformed the economy by 43.7 percentage points, follows the proposed dividend pay-out from 23 of the companies listed on Nigerian Exchange Limited, NGX” 

The stock market’s average return is about 10% annually, and believe it or not, that’s pretty decent, but many investors fail to earn that 10%, simply because they don’t stay invested long enough. They often move in and out of the stock market at the worst possible times, missing out on annual returns. 

The stock market generally can build wealth. The times where things may go wrong generally can be traced back to inexperienced stockholders buying the wrong shares or a rare case of a freak accident. Stocks have some distinct disadvantages of which individual investors should be aware: Stock prices are risky and volatile. Prices can be erratic, rising and declining quickly, often in relation to companies’ policies, which individual investors do not influence. 

But for the most part, more people are earning from stocks than their loosing counterparts. 

Silas Ugochi

Silas Ugochi is a Staff Writer and Content Creator at GetFundedAfrica. Ugochi is an educated content writer who relishes using her skills to help GetFundedAfrica's Media Team achieve the goal of sharing the success stories of African entrepreneurs. When she isn't writing articles, she can be found listening to music, reading, or DJing.

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