How Do Bank Shares Work?
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Question
How do bank shares work? What should I look out for? How valuable are they and should I invest in them? How do I buy them?
Answer
With a good number of banks making announcements of their offerings to the public about investing in their shares, it’s only fair we talk about them. You see, as part of the recent bank recapitalization policy initiated by the Central Bank of Nigeria (CBN), several banks have moved swiftly to raise additional capital to meet the new regulatory requirements. This policy mandated banks to increase their minimum capital base. In response, a growing number of banks have launched public offers, inviting both existing and new investors to participate in these fundraising efforts. These public offers are not only a means to comply with the CBN's directive but also an opportunity for the banks to fund future expansion plans.
Now, a bank share is a unit of ownership in a bank, giving the shareholder a stake in the bank's profits and assets. As you will see in this letter, it works pretty much as company shares do. The only difference being that the former deals with a bank and the latter with a business.
How Do Nigerian Bank Shares Work?
When you purchase these shares, you become a shareholder, which means you own a small part of the bank. As a shareholder, you may receive dividends, which are a portion of the bank's profits distributed to shareholders. You also stand to benefit from capital gains if the value of the share itself increases over time.
What Should You Look Out For?
1. Financial Health: The same way we always advise you to do your research on companies before investing is the way you should also look at the bank's financial statements. Don’t assume that because it’s a bank, they will always perform well financially. Healthy banks typically have strong earnings, low debt levels, and good liquidity. For instance, the Tier one banks, FUGAZ, have consistently shown strong financial performance.
2. Dividend History: Check the bank's history of paying dividends. Consistent dividend payments can tell you a stable and profitable bank. You should be considering banks that have a solid track record of paying dividends.
3. Regulatory Compliance: Check the news, do your research! Ensure the said bank complies with regulatory requirements set by the Central Bank of Nigeria (CBN) and other relevant authorities. Adherence to these regulations is crucial for their stability in the long run.
4. Management Quality: The bank's leadership team plays a critical role in its success. Research the background and track record of the bank's executives. Leadership changes, such as the recent CEO appointments at some banks, can impact investor confidence.
How Do You Buy Nigerian Bank Shares?
1. Research: Before making a purchase, research the bank thoroughly. Look at its financial performance, market position, and future growth prospects. Recent mergers and acquisitions in the Nigerian banking sector can also influence your decision.
2. Place an Order: Once you've decided on the bank and the number of shares you want to buy, place an order through your brokerage account. In Nigeria, platforms like Meristem, CardinalStone, and Stanbic IBTC provide brokerage services. Some fintech apps make this easier for you, too. You can choose between a market order (buy at the current price) or a limit order (buy at a specific price).
3. Monitor Your Investment: After purchasing the shares, keep an eye on your investment. Stay informed about the bank's performance and any industry developments as regulatory changes and economic policies can impact share prices.
How Valuable Are Nigerian Bank Shares and Should You Invest in Them?
Like we already established, bank shares work the same as company shares. This means the value of bank shares can fluctuate based on several factors, including the bank's performance, economic conditions, and so on. This is why you want to consider only stable options, especially those of well-established banks with strong financials.
Truth is, bank shares can provide a steady stream of dividends and potential capital appreciation, making them attractive for long-term investors. However, they are not without risk, especially given the country’s economic volatility.
Do Bank Shares Increase or Decrease in Units or Value on a Year-to-Year Basis?
The number of shares you own (units) does not change unless you buy more shares or sell some. However, a bank might issue more shares or buy back shares which can affect the total number of outstanding shares. The value of your shares on the other hand can increase or decrease based on the bank's performance and overall market conditions.
Final Thoughts
Investing in Nigerian banks’ shares can be a strategic addition to diversify your portfolio, providing both dividend income and the potential for capital gains. However, it's essential to conduct thorough research and stay informed about the factors that can impact your investment. Speaking about research, you can check the current prices of Nigerian banks’ shares here.
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