A lot of opinions about the MTN IPO have been doing rounds, with many lambasting investing in MTN, primarily apparently because the dividends earned are very small and conclusions have generally been than ROI on investing in MTN would take ages to be achieved.
Even I who divorced MTN, because I was not satisfied with their services found these opinions obnoxious, disappointing and an exhibition of lack of proper knowledge of how trading in stocks/shares works. This is more so, because, some of their writers claim to be investment experts but fail to take into account that beyond just dividends, there are many other parameters that determine investment decisions, eg, ROI, NPV, personal/religious beliefs ( eg a staunch Moslem would consider investing in a pork factory however profitable), etc
In very simple terms, shares in public limited companies are much like any good that can be bought and sold. For example maize, Sesame, beans, etc. For public limited companies, unlike Private Limited companies, these shares can be freely transferable, meaning, they can be sold at anytime on the basis of willing buyer willing seller.
For the purposes of a “man of everyday” (omuntu wabulijo), I’ll leave out the involvement of the USE in this.
When a company like MTN goes public, The Company’s share price at the time of the IPO is determined by the valuation of the Company, it’s assets against liabilities, market share, investments, etc, divided by the total number of shares at listing.
After the IPO, the prices in the stock market are driven by “supply and demand”. This makes the stock market similar to other economic markets. When a stock is sold, a buyer and seller exchange money for share ownership. The price for which the stock is purchased becomes the new market price. When a second share is sold, this price becomes the newest market price, etc.
For example the dealers in produce know how prices of agricultural products fluctuate. A kilo of maize that costs say 100/- will cost 1,000/- in a day or in a week. Such that within a week, a person who has bought maize today at 100/- will make a gross profit of 900/-. Just as the price can fall from say 100/- to 50/-
When the price falls what we, from Busembatia do, is to hold on to our maize until the price improves, and it always does, then we sell.
All this, is because a major event can rapidly increase or decrease the price. Like we saw recently, the FB, Whatsap and Instagram outage caused Mark Zuckerberg’s personal wealth to fall by nearly $7 billion. This was because as a result of the outage, the FB Whatsap and IG stock value plummeted by around 5%
Much like in Agriculture too much rain or too little rain can cause low or high yields which affects the price and the knockoff effect could be people choosing to shift to other products, etc. all these lead to price fluctuations.
After resolving the challenges, the share price of Facebook is stabilizing and recovering and probably in a week, the price will be back to old price if not higher. Now, assuming one bought the FB shares a the time the price had plummeted at say $100 per share. And bought 10,000 shares for one million dollars and in a week, after stabilization of FB operations the shares gain by say 5% and the new price is say $250, the new value of your investment is now $2,500,00 in under one week. This makes you $1,500,000 richer. In under one week.
We saw this same trend when Nike signed a deal with former NFL quarterback Colin Kaepernick. The Nike stocks suffered a dip because of concerns about consumer boycott because of that deal. However, when the demand of the Nike products surged upwards largely because black Americans started buying nike products in high numbers. The company’s stock started to rise, surging to a year high of 33%.
There are many reasons why people trade in stocks but the primary goal most times is not dividends, because dividends are always small, but it’s to target benefiting from the price fluctuations. As seen in the above hypothetical case.
That’s why wise investors buy into companies whose stock prices are going down and the bide out their time and at the right moment they sale and make a killing. You need to read about how the Warren Buffets have made their money!
Eg. Nike stock this week has appreciated by $2.96 per share. If at the start of the week you bought stock worth $1,000,000 at $154.32 that would amount to 6,480.04 shares. If you were to sell each share at the new price of 156.30, you would earn about 1,017,042.51, netting you a gross profit of $17, 042.51. In just under a week. Tell me any other business capable of earning you that much in the comfort of your seating room?
When you buy and sell at the right moments, nothing beats it. Only problem is that African belief is that until one has brick and mortar, read buildings, he’s not rich.
It is very funny that for example, a person who sells maize in kisenyi, failing to see the connection between what he does and dealing in stocks! All because of this misleading information.
For example, as between buying shares and investing in fixed deposits, I’d invest in stock. Because profitability on stocks potentially is much higher in a much short time like we have seen above and more importantly because investing in fixed deposits is subject to a 15% capital Gains tax yet on sales of stock doesn’t attract any tax.
I have used simple/ simplicity in this post to make it easy for everyone to understand and make a contribution to the debate.
The Uganda Stock Exchange must invest in educating the public on how these things work.