How to Start Investing In the Nigerian Stock Market
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The Nigerian stock market was shaken in 2008 by the global financial crisis and a domestic banking crisis that caused stock prices to plummet. The market has since recovered though it is yet to attain the pre-crisis heights of 2007 when market capitalization of listed equities was $84 billion.
The Nigerian stock market attracts large foreign investors’ portfolio due to the attractive returns it offers. For instance, in 2018, foreign portfolio flows accounted for about 51 percent of total market transactions. Also in the period 2011 to 2015, foreign transactions consistently outperformed domestic component.
And now, Nigerian equities are more attractively valued and present viable investing opportunities for any one who desires to invest in Nigeria.
This article introduces you to the Nigerian stock market and shows you how to invest in it. What you will learn here include:
How the Nigerian Stock Market Is Organized
How to start investing in the market
How to choose a stockbroker
About Transaction Cost and taxes
How to withdraw your money
The E-Dividend payment Process
Now lets get into it!
How the Nigerian Stock Market Is Organized
Stock trading activities in Nigeria is conducted at the Nigeria Stock Exchange and the NASD OTC. Let’s look at these exchanges in some details.
The Nigeria Stock Exchange (NSE)
The NSE is the first and major stock exchange in Nigeria where publicly quoted equities and other debt securities are traded. It was established in 1961 as Lagos Stock Exchange and became the Nigeria Stock Exchange in 1977 with just 19 listed securities. It is a company limited by guarantee and owned by its members though the process to demutualize it is ongoing.
The Nigeria Stock Exchange is a leading Exchange in Africa and the biggest in West Africa with headquarters in Lagos and 13 trading floors spread across the three geo-political zones of the country.
With about 169 publicly listed equities, $33 billion market capitalization and an average monthly turnover of about 8 billion shares, the Nigeria stock exchange is one of the most active stock markets in sub Saharan Africa. It is ranked third after South Africa and Botswana, according to a 2019 report.
Equities and debt securities are both traded at the NSE including exchange traded funds, REITs and bonds. Equities traded cut across economic and business sectors including industrial and consumer goods, health care, consumer services, oil and gas, technology and financial services. With about 21 deposit money banks listed, the banking sub sector is arguably the most active at the Nigeria stock exchange in terms of volume of transactions.
NASD OTC Securities Exchange
The National Association of Securities Dealers (NASD OTC) is a securities exchange designed to formalize the Over the Counter market in Nigeria. It provides an organized platform for the trading of unlisted equities and other instruments not listed on traditional exchanges but approved by the Securities and Exchange Commission. It also provide a centralized source of information and price discovery for unlisted public companies in Nigeria.
The NASD OTC Securities Exchange is a self-regulatory organization which is owned by 59 capital market operators in Nigeria and regulated by SEC.
At the moment there about 39 firms whose shares are traded on the NASD OTC platform with a market value of about $1.7 billion as at the end of first quarter of 2019.
How to Start Investing In the Nigeria Stock Market
To start investing in the Nigeria Stock Market, you first have to decide whether to invest in listed securities or in unlisted firms. Most investors prefer to invest in publicly listed equities. As highlighted earlier the market for publicly quoted equities is the Nigeria Stock Exchange (NSE).
Thereafter, take the following steps to invest
#1. Choose a Stockbroker – Investing in the Nigerian stock market is done through approved stockbrokers. Normally, stockbrokers are employees of stock brokerage houses who are registered by the Securities and Exchange Commission and are approved as dealing members of the Nigeria Stock Exchange.
There are over 300 approved stock brokerage houses in Nigeria and you can get the full list of these firms from the website of the securities and exchange commission and the Nigeria Stock Exchange. Go through the list of these approved brokerage houses, take not of their contact addresses, websites and email addresses.
Narrow down your choices and send them emails inquire about their account opening processes and requirements and other information that you may want to know to aid your decisions.
Though there are standard rules governing the operations of brokerage houses in Nigeria, each firm have its internal policies on account opening. Some will require a minimum deposit for account opening, others may not.
#2. Open a Brokerage and CSCS Accounts – Having decided on a stock brokerage firm to use, the next thing you have to do is open a brokerage account and a CSCS account. The brokerage firm will open these two accounts for you.
The brokerage account is an internal account to capture transactions between you and the brokerage house. On the other hand, the CSCS account warehouses the securities that the brokerage house purchase on your behalf. CSCS stands for Central Securities Clearing System. It is central depository for traded securities in the Nigerian equities and debt capital market.
To open both the brokerage and the CSCS account requires some form of documentations. Fill these forms and, scan and send the required documents to complete the Know Your Customer requirements as needed for account opening. Some of these documents include passport photograph, valid means of identification and utility bill (as proof of address). For corporate account, company incorporation documents and a board resolution may be required.
#3. Decide on what stocks to invest in – This requires that you conduct your research using relevant tools available to you. The Nigeria stock exchange offers historical data services which investors can subscribe to in order to get information on listed companies. This data will help you conduct both technical and fundamental analysis of companies of interest to you.
Many stock brokerage houses offer research services for free to their customers and these can be obtained from their websites or special request. Find out if your stock broker offers good research or data services to their customers and at what cost as some firms charge some amount for this.
There are also research firms that have deep knowledge of the domestic market that you can consult to assist you analyze and recommend stocks to invest in.
#4. Fund Your Brokerage Account – Having done proper analysis of the equities you wish to buy, it is time to fund your account with the brokerage firm. This can be by bank transfer or direct lodgement of cheque or draft into the brokerage firm’s account. Foreign customers can fund by wire transfer.
#5. Give your Trade Mandate – You can give your trade mandate either by email or by using the brokerage firm’s online portal. Due to the need for transaction trail, it is usually better to give you mandate in writing. Some brokerage firms have printed mandate forms which clients download from their websites, fill, scan and send to the broker for execution. By all means, oral mandate via telephone is discouraged.
On execution of the trade mandate your stockbroker will send you a contract note showing quantities of stocks bought or sold, the price at which it was bought or sold, brokerage commission and other statutory charges.
Online trading is also gaining currency and some savvy investors will prefer to use the trading portals of their brokers to trade on their accounts directly from their offices or homes. So in choosing a stock broker, select one that have online trading portal if you wish to trade by yourself.
About Transaction Cost and Taxes
Transaction charges for equities on the Nigeria Stock Exchange are as prescribed by the regulatory authorities. At the moment total charges for purchased transactions is 1.80 percent of value of transaction and total charges for sale transaction is 2.10 percent of value of transaction.
The table below show the detail of transaction charges as currently published by the NSE
CSCS Trade Alert
VAT on Trade Alert
CSCS Trade Alert
VAT on Trade Alert
CSCS Transaction Fee
VAT on Transaction Fee
Of important note is that investors can negotiate the broker’s commission with their stock brokerage firms for large volume transactions.
Apart from VAT and Stamp Duties, no tax is charged on stock purchases and sales in Nigeria. However, dividend payment is subject to withholding tax.
Transactions are settled on the basis of T+3, that is, four days from the date the transaction took place. Thus, if you bought stock on a Monday, you expect to see the stock in your position by Thursday and if you sold stock on Monday, the proceed of sale would have settled in your account for withdrawal by Thursday.
Withdrawal of Sale Proceed
Generally transactions are tied to the stock brokerage firm through the which transaction is executed. Consequently, proceeds of sale will usually settled in the brokerage house’s settlement account on T+3 basis. The brokerage firm thereafter credits your brokerage account making it available for withdrawal on request.
As soon as the transaction is settled you are at liberty to give instruction for your account to be credited.
An investor can however, elect to be directly credited with the proceed of sale under the direct cash settlement initiative. In 2016, the Securities and Exchange Commission (SEC) and the Nigeria Stock Exchange initiated the direct cash settlement system as one of the measures to curtail fraudulent practices by stockbrokers. Under this arrangement, proceed of sales is directly credited to the investor’s nominated bank account instead of the transaction settling in the stockbroker’s settlement account.
Electronic Dividend Payment
The incidence of unclaimed dividend has been a headache to regulators and operators in the Nigerian stock market. It is estimated that over $196 million worth of dividend is unclaimed. A lot of factors, ranging from poor postal delivery system to poor investors’ knowledge are responsible for the growing amount of unclaimed dividend in Nigeria.
To curb the growth of unclaimed dividend, the regulatory authorities came with the idea of e-dividend which requires every investor in the Nigerian capital market to register for the payment of their dividend electronically. With this arrangement it is no longer necessary to for company registrars to deliver dividend warrants by postal mails,
Dividends payments are now directly credited to investors nominated bank accounts once they are declared. So to make sure you receive your dividend regularly, register for the e-dividend program. You can do this either through the registrars or your bankers. SEC has also provided a platform for investors to enroll.
There you have it. How to invest in the Nigerian Stock Market. Let’s have your views or questions if there are areas you will want highlighted.
If you desire to invest in Nigeria and need some help doing so, I and my team are available to work for you. We can help with all the processes, from getting a credible brokerage firm to researching, analysing and recommending stocks; monitoring and ensuring you have a beautiful investing experience.
Buchi provides small business owners with strategic, financial, and digital support to help them build strong, successful and profitable enterprises. He is a Blogger at night and by day, Team Lead at Stalwart Investment Partners Ltd, a research, business and investment advisory firm.