By Audrey Mwala
Introduction
Have you already joined the Malawi Stock Exchange Market? Well, you may be losing out if you are outside. Especially now when the world commodity prices in general are tumbling down because of Corona virus, you will lose out if you are like most people that are scared and are selling instead of buying. A crisis is an opportunity, and there are a great number of millionaires that are actually made during market crashes. When people are exiting the market, financially educated people understand that they world market goes through a cycle of ups and downs, and so they move in to buy when the majority of people are opting out.
The Malawi Stock Market is not 100% information efficient. Prices don’t fluctuate immediately in response to company, local, or global events, and so this far in spite of the Corona virus’s impact, we are holding it up in terms of prices. I am glad. But it’s not for too long if the virus stays with the world too long; even our market will eventually respond. When the underlying performance of the companies becomes evidently hit with the virus, the business problems in the factories and offices will begin to reflect in the price of the company shares on the stock market. Please note that probably 80% of the shares are held by institutional investors, i.e., the pension funds that are limited by regulations on how much to invest outside the country and how much they can invest in other riskier asset classes, and so holding their investments on the Malawi Stock Market is a reasonable step. If they sell, where do they invest? Prices of stock, among other things, are a factor of supply and demand. If no one is selling, prices will hold, and that’s where we are with this Covid-19 situation.
Capital gains
But anyway let’s leave Mr. Corona Covid (Mr. CC) aside let’s talk about the business of investing on the stock exchange as if Mr. CC doesn’t exist. Imagine since Malawi Stock Exchange started in 1996 if you decided to only buy K30,000 worth of shares in every initial public listing of each company that has listed on the stock exchange and stayed without selling, only enjoying the dividends by now your total portfolio was going to be K28millom. That’s a great achievement for someone who can only afford K30, 000 once in a while. It’s not about buying every month but once or at most twice a year and none in some 2 years in between. Imagine another person who is serious and decides to invest K1,000,000 on each IPO by now the portfolio would be well over very close to K1 billion. Looking by the slow pace at which new companies come on the stock exchange one can literally take a K1 million loan every time a new company is going public. Looking at this for someone who knew what to do 24 years ago becoming a billionaire with the stock exchange is easy. But this is not 24 years ago we are today. So let’s look into the future and believe that we have the 24 years ahead of us to play catch up. The important thing is to start. Not everyone is well conversant with the idea of investing in stocks so let’s start from the basics.
What is a share or a stock?
A share or stock is a unit, of what an investor owns in a company in exchange of the money that he puts in the company. One can buy shares directly from the company, i.e. the company issues shares for sale to raise money and so the money goes into the company. One can also buy shares from an existing shareholder who wants to liquidate his investment so the money goes to the seller. Both kinds of trade can happen at the primary market i.e. when the company is listing on the stock exchange for the first time or at the secondary market when shares are already trading on the stock exchange. There is also another window to buy shares on the Alternative Stock Exchange (ALTEX) this for companies that are not listed at the main exchange platform but they are on the stock exchange (but let this be for another day) just like buying shares in a private company that is a company not listed on the stock exchange. This is usually a private arrangement where the owner of the private company established the value of each share and the money goes to the owner’s pocket or the money can go into the company to boast capital. But again, let me focus on the mainstream Capital Market the Stock Exchange and let this area be for another day.
Currently the Malawi Stock Exchange has around 15 companies that one can invest in. When a company is listing on the Stock Exchange, it compiles a prospectus, a document that provides professional information to investors. This allows investors to benefit from the professional due diligence on the company. In addition, you can also get advice from your stockbroker which counters are good to invest in. When you invest in shares, you become the part owner of the company. If you invest more that 50% you can control the company. Investment in shares is a good long term investment. A wealthy gentleman called Warren Buffett amassed a fortune worth over $50 billion dollars using the stock market. You need to invest over a long period of time and invest in a number of counters. Warren Buffett made over 99% of his fortune after his hitting the age of 50.
Benefits of investing in shares
To buy shares you need to find a stockbroking firm. These are licensed firms to deal with share trading at the Stock Market… You will advise them how much money you want to invest and which company you are interested in. You can also ask for professional advice on which company you should invest in. The stockbroker then buys the shares for you and gives you a share certificate. Your name will be included in the register of shareholders of that particular company. You will be entitled to receive annual reports of that company and you can attend Annual General Meetings. You will also receive a dividend; your share of profits at the end of the year if the company has made profits and if directors have decided to give out a dividend.
How to buy shares
The first step is to take a look at the stock market portfolio to see the companies that are trading there. Familiarise yourself with the kind of businesses or sectors which these companies are in. It could be banking, manufacturing, insurance or hospitality, you should pick the sectors that are of interest to you. Information about stock market is available in the newspapers, or even at the stock exchange or on their website.
Make sure you have a reasonable amount of money because there is a minimum amount that will allow you to buy shares. Keep at least K100, 000. For very small investors even kids can save up this amount for a while and then buy shares when the money is ready. For some IPOs you can buy shares for even less than K100, 000.
Look for a Stockbroking firm to handle your trade. The stockbroker will provide you with application forms and will also guide you on which shares will be best for you. The stockbroker is your middle man; he is the one to go on the actual market to do the trade.
Once the trade is done you will receive a share certificate, hard copy or electronic identification of your shares.
Keep track of your investment to see how it is performing. You will receive annual reports and invitation to attend Annual General Meetings. Take time to attend, you will have a chance to vote for new directors and their fees, auditors as well as receive audited financial statements.
If you want to sell your shares you also go through a stockbroker who finds a buyer for you. You can also find a buyer yourself and you both just finalise the trade at the stockbroker.
Which shares should I buy?
It is not an easy thing to pick the best company to buy shares from, though there is a lot of fundamental analysis that one can do there are also some emotions that crop in and faith and hope that the picked company will perform well. Some great blue chip companies today may turn sour in 5 years’ time for events that were never foreseen.
But generally one can use the following guide and hope for the best. Remember just like every investment is risky, so it’s the case with investment in shares it can go either way.
Blue Chip Companies– these are companies that have been around for a while and have consistently posted profits and growth year after year. Companies that have been on the stock market for more than 10 years and the market capitalisation keeps growing are a good investment because of stability and because they are well established.
Good management- have you seen a company that does so badly until a new manager comes on board and contract is evident like day and night? Management has a lot to do with the potential that an organisation can perform at. Scrutinise the management of the organisation and companies with well experienced great managers are a best investment. They are likely going to be innovative and drive the company to a new level.
Growth Companies– look for industries that are growing. Right now Mr. CC has given us a clue on which companies to invest in. It’s those who are using modern technology to break the traditional way of doing business.
Earnings per share- an easier measure is a comparison of total earnings of a company divided by the number of shares in a company. You can compare i.e. with another company to measure how much profits the company is making per share. The company with more earnings per share is making more money and is efficient.
Dividends per share– this is another measure that would be of interest to investors that rely of dividends as sources of steady cash flow. As an investor if a company gives out more dividends per share it will be more attractive to invest in. This is more attractive for investors that need to receive dividends every year to meet their daily expenses.
Price earnings ratio (P/E) – this is a measure of price of the share compared to or divided by the earning per share of the company. Again it’s a comparative analysis where you compare share Price earnings ratio of one company to another company. For a company with a low P/E ratio, the price earnings ratio is low, it means the company is earning more and the price is lower compared to a company with a high P/E. It’s cheaper to buy from a company with a low P/E. but on the other hand people may also buy in a company with a high P/E ratio when they have confidence and hope that the compare will earn more profits in future.
Gearing ratio– this ratio compares the debt of the company to its assets. It assesses the extent to which the company is exposed to debt. The gearing ratio of above 1 is generally considered risky it means the company is heavily burdened with debt there is a chance it may not be able to meet its debt obligations.
Price to book ratio– this ratio compares the price of a share to the net asset value per share. A lower ratio of say 2 is seen as good value and above that is seen as an overvalued share. This is a measure of how much you are paying for the value of the assets minus liabilities.
Understand the company– its best to buy shares of a company that you understand what it is doing. There are many companies that you know they are in some sector but you can’t understand what exactly the business is about. If you can’t understand it shun away from it.
Diversified portfolio– Since most or not all us may understand stock markets that well to know which one to pick, it’s better to invest in an index stock such as a mutual fund or a closed end investment vehicle like NITL in Malawi. Though the fund may suffer as well sometimes but there is a bit of cushion because the fund itself invests in a wide portfolio of both quoted and non- quoted investments providing diversification benefits that help when one investment is not doing well.
With index fund such as Old Mutual fund, the share price is marked to market a direct reflection of the current under laying share price of the various shares. With a closed end investment the share price is not marked to market instantly.
But both options provide diversification benefits and they are good for non- experienced investors
When to buy shares
You can buy shares anytime as long as you are in it for the long term you have a chance of gaining from the share price increase and dividends along the way. However the best time to buy shares is when a company is going public for the first time commonly known as an initial public offer (IPO) the price. At this point shares are usually sold at a discount and with time it moves up faster than the shares that were already trading on the market. When the IPO was oversubscribed, it pushes the price up even faster as demand for those shares grows.
You can also gain quickly when you invest in a company whose stock price has fallen; usually at this point the shareholders are trying to come up with a strategy to revive the performance so you can hope that once the company is reorganized the shares will bounce back in the long term. You also buy cheap at this point.
You will also benefit a lot if you invest in shares during market crushes when the market turns bearish and prices are down is the best time. During this time shares sell cheap. It’s the same as real estate investment; the best time to buy is when the real estate market is down. You are likely going to buy at a deep discount and you will win if you stay in for the long haul. So when a market crushes, celebrate and get in it. So when the majority of people are going out of the market that’s the time for you to go into the market; – you buy cheap.
Buy shares when you are not desperate for cash and when you are ready to wait for the long haul. Shares are not a short term speculative investment. You will be disappointed to see that sometimes the shares price can go down before it goes up again. So invest when you are ready for the long haul ride. A company called NITL, a closed end investment vehicle in Malawi sold its shares at IPO at K1 per share it experienced tremendous growth to about K56 per share. One of its underlying investment suffered some internal challenges that affected the market price, as a result the share price of NITL dropped drastically. Within 2 years or so it picked up again to over K86 per share. The point is if you are short term investor you will be caught up in these kinds of turbulence but if you are in it for the long terms you can patiently wait for the rebound.