What does this mean?
Last week, incredible things happened in the stock market when the NGX Index crossed 100,000 basis point. The drivers of the bullish run remained BUA Cement, which gained 9.98%; Dangote Cement, which gained 6.49%; and BUA Foods, which gained 5.49%.
There have been lots of stock recommendations here and there, with predictions that these stocks could do 10x, 100x, and even more.
While the predictions may not be wrong, the questions to ask are: Will the recommended stocks really go up? What are the basis on which people are making these predictions?
It’s time for some learning. Are you ready?
Why do stocks go up?
Every investor aims to make returns from the stock market by buying low and selling high.
But the question is: Where does the stock returns come from?
There are two main components:
- Speculative Returns
- Investment Returns
Speculative Returns: These are gains or losses from investments that are based on short-term market trends, rumours, or hype rather than the actual fundamentals of the company. They’re like betting on the short-term movement of a stock without considering its long-term value.
Investment Returns: These are gains or losses from investments that are based on the long-term performance and growth potential of a company. Investors focus on factors like earnings, dividends, and overall business strength to make informed decisions about buying and holding stocks for the long term.
However, the fact that a company is efficiently operated and constantly growing is not enough reason to buy its stocks. If you want to make good money from the stock market, then you need to identify its intrinsic value and then buy below it.
What are intrinsic values?
The intrinsic value of a company’s stock is like the true worth or value of the company itself. It’s what the company is actually worth based on its assets, earnings, growth potential, and other factors.
Investors use the intrinsic value to judge whether a stock is undervalued, overvalued, or priced fairly in the market. If a stock’s price is lower than its intrinsic value, it may be considered undervalued, suggesting it’s a good buy because it has the potential to rise in the future. On the other hand, if a stock’s price is higher than its intrinsic value, it may be considered overvalued, indicating that it’s too expensive and may not provide good returns in the long run.
To judge the next stock to buy using intrinsic value, investors typically analyse various factors such as the company’s financial statements, growth prospects, industry trends, competitive advantages, and future cash flows. They then compare these factors to the current market price of the stock to determine whether it’s a good investment opportunity.
When should you invest?
As an investor, the timing of when to invest depends on various factors including your financial goals, risk tolerance, and market conditions. Here are some considerations to help you decide when to invest:
- Financial Goals: Determine your investment objectives and time horizon. If you’re investing for long-term goals like retirement or education expenses, you may have a longer time horizon and can afford to ride out market fluctuations.
- Market Conditions: Keep an eye on market trends and valuations. While trying to time the market perfectly is difficult, you can look for opportunities when stocks are undervalued or when market conditions are favourable for long-term growth.
- Cost Averaging: Consider using a strategy like cost averaging, where you invest a fixed amount of money at regular intervals regardless of market fluctuations. This approach can help mitigate the impact of market volatility on your investments.
- Emergency Fund: Ensure you have an emergency fund in place to cover unexpected expenses before investing. Having a financial cushion can provide peace of mind and prevent the need to sell investments during downturns.
- Risk Tolerance: Assess your risk tolerance and investment comfort level. Understand that investing involves risks, and you should only invest money that you can afford to lose or won’t need in the short-term.
- Stay Informed: Stay informed about economic indicators, company performance, and market news. This knowledge can help you make informed investment decisions and stay ahead of market trends.
Ultimately, the best time to invest is when you have a clear understanding of your financial goals, a well-thought-out investment plan, and the discipline to stick to your strategy through market ups and downs. It’s also important to seek advice from financial professionals if needed and to continually review and adjust your investment strategy as your financial situation and goals evolve.
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