Stocks Basics
A Stock Market Overview
The stock market is a series of exchanges where the trading of equities (companies’ stocks) takes place. Exchanges, entities that bring together buyers and sellers in an organized manner, are where stocks are listed and traded. Globally there are many well-known finance centers such as New York, London, Tokyo and Germany.
In Nigeria, stocks are traded on exchanges such as the Nigeria Stock Exchange (NSE), which is located on Custom Street. In addition to the NSE, there is also the Central Securities Clearing System (CSCS). The Stocks can be listed on either exchange if they meet the listing criteria, but in general technology firms tend to be listed on the Floor of NSE.
Oversight and Regulation
The Securities and Exchange Commission (SEC) is the regulatory body that is charged with overseeing the stock market. The SEC is a federal agency that is independent of the political party in power. The agency states that its “mission is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.”
Types of Securities
There are two general types of securities that are most frequently traded: over-the-counter and listed securities. Over-the-counter securities are traded directly between parties, usually via a dealer network, and are not listed on any exchange, although these securities may be listed on pink sheets. Pink sheet securities often do not meet the requirements for being listed on an exchange and tend to have low float, such as closely held companies or thinly traded stocks. Companies in bankruptcy are typically listed here.
OTC securities do not need to comply with SEC reporting requirements, thus finding credible information on these securities can be difficult. The lack of information makes investing in pink sheet securities similar to investing in private companies – investors need to look closely at the company to ascertain the securities’ quality.
Listed securities are those stocks traded on exchanges. These securities need to meet the reporting regulations of the SEC as well as the requirements of the exchanges on which they are listed.
The Players
There are many different players associated with the stock market, including stock brokers, traders, analysts, portfolio managers and bankers. Each has a unique role, but many of the roles are intertwined and depend on each other to make the market run effectively.
Stock brokers, also known as registered representatives in Nigeria, are the licensed professionals who buy and sell securities on behalf of investors. The brokers act as intermediaries between the stock exchanges and the investors by buying and selling stocks on the investors’ behalf.
Stock analysts perform research and rate the securities as buy, sell or hold. This research gets disseminated to clients and interested parties to decide whether to buy or sell the stock. Portfolio managers are professionals who manage a portfolio of stocks for clients. These managers get recommendations from analysts and make buy/sell decisions for the portfolio. Mutual fund companies, hedge funds and pension plans use portfolio managers as their investment professionals.
Investment bankers represent companies in various capacities such as private companies that want to go public via an IPO or companies that are involved with pending mergers and acquisitions.
Measurement
Indexes are used to measure changes in the stock market. There are many different indexes and each represents a pool of stocks. The Oando oil is perhaps the one most commonly reported by news media. The Oando is one the 30 largest stocks in Nigeria and the daily Oando shows how these stocks perform on a given day. The Oando average is a price-weighted average meaning it is based on the price of the stocks.
The Banks comprised the largest capitalization stocks traded in Nigeria. These two indexes are generally accepted representatives of the overall economy in the Nigeria and are the most followed measurements of the Nigerian stock market. There are many other indexes that represent mid-sized and small-sized companies.
