“The stock owner should not be too concerned with erratic fluctuations in stock prices, since in the short term, the stock market behaves like a voting machine, but in the longer term, it acts like a weighing machine.’’ Benjamin Graham- Father of Value Investing
All over the world, the process of selecting leaders is as important as the citizens’ means of livelihood. This is premised on the fact that everything rises and falls on leadership. Therefore, it becomes paramount that the voting process should be transparent, fair, credible, reliable and easily accessible to those eligible to exercise it. A voting system therefore, is a process by which voters make a choice between options, often in an election or on a policy referendum. An election simply gives room for the voters to choose leaders of their choice.
Economic and Political Processes Revolve Around Good Leadership
Convincing voters to obtain their vote is the essence of a political campaign. Candidates must continue to prove to the voters that they are capable of delivering the dividends of good leadership by matching their promises with corresponding actions and providing sufficient thought leadership manifesto that creates a viable future for the voters on economic, social and personal perspectives among others. Strategies for campaigning include, debates, advertising, theme songs, rhapsodic speeches and statistical analyses among others. Today, every word, every action and even perceived thoughts are paraded before the public. All these are done as proof to convince the electorate that they deserve their votes.
In Nigeria, the process of voting begins by registering with the Independent National Electoral Commission (INEC) after an individual has attained the age of 18 and above. This will enable the voter to have his/her name on the register with a unique card as evidence. On the voting day, accreditation starts by 9.00am where the presiding officers from INEC validate the name of voters in the register. Voting commences at 12.pm until 4.00pm. The returning officer (INEC Official) collates the votes from the various polling units, making sure that the votes counted are valid and that all the rules guiding valid voting are duly observed before pronouncing the results.
In a similar vein, companies that are successful tend to have good leadership, who understand the markets they operate in, its wider ecosystem, can identify, recruit, motivate and retain the right people, create durable internal and external networks, empower their teams, deploy the appropriate technologies and implement processes that will enable their firms to achieve durable competitive advantage.
Such companies often require long term low cost funds to grow or achieve their aspirations and the owners (shareholders) and leadership may want to value their investment in the firm or seek to discover its real value or price per time, or even divest to other investors. Here comes the critical role of the Stock Exchange.
Companies typically come to the Exchange (or ‘the market’ as it is often referred to colloquially), to either raise long term funds from investors to grow their business and achieve their strategic aspirations and/or to realize the value of their assets. However, coming to the market also accrue additional benefits to the company, the most notable probably being the compliance with a higher corporate governance standard.
It is therefore required for the Exchange to provide a structure (or regulation) that allows companies (or indeed governments) to raise funds in the market and/or to realize the market value of their investments. The Stock Exchange by virtue of its daily operations serves as a quintessential institution for a model voting machine. It is an organized and regulated financial market where securities (equities, bonds, notes, currencies, commodities or derivatives of these), are bought and sold at prices governed by the forces of demand and supply – which is effectively the totality of the vote of the investors.
The Stock Exchange is an organized market with rules, oversight and various players involved in the movement of securities. Her core function is to ensure fair and orderly trading, as well as efficient dissemination of price information for securities traded, leveraging on cutting-edge technology. It presents companies, governments and other groups with opportunities to sell (and buy) securities to the investing public. In the same way, candidates in a political process have to meet certain requirements before being cleared by INEC; the Nigerian Stock Exchange (NSE) has certain minimum requirements for admitting companies and securities to list and trade. In addition, there are post-listing requirements which the promoters of a security (issuers) to be listed must adhere to if they want to continue to be reckoned with on the daily official list of the Exchange, a report that lists all the securities, their prices and much more after each trading day.
There are many advantages for being in the league of quoted companies on an Exchange. Apart from the visibility that it cheaply offers the company, it also strengthens its corporate governance, which has been proven to enhance the capability of its leadership and the prospects of the company. Listing on the Exchange entails that the company has decided to “dance naked in the square and wash its linen in full public glare”. The company’s statistics and profile has to be in the public domain (full disclosure) to enable investors make informed decision so as to avoid shooting in the dark. By doing so, such companies benefit by ensuring that leadership take appropriate steps to always seek to act in the best interest of its owners – the investors or shareholders.
Although some Exchanges are more rigid than others in terms of their rules, the basic post-listing requirements for all markets include – the submission of regular interim financial reports, audited earnings reports and other news items such as changes in board and senior management as well as price sensitive information from the company that will be of value to investors in making investment decisions in the company.
As is obtainable in all economies of the world, the Stock Market is the barometer of the economy. It measures the dynamics of economic and political interplay within the economy and a forward indicator of where the economy is headed. Most of the time, whatever direction the stock market goes, is totally dependent on the health of the various sectors of the economy that are represented by the various companies classified according to the Industries they belong. It is where investors express their emotions or reactions, or put differently, cast their vote, regarding the performance of the companies in which they have shares or stakes in. Sometimes these emotions could be speculative, personal or based on facts and figures made available by these companies as part of their statutory post listing requirements. In modern terms, investors also express their emotions and reactions on the economy of countries through the Exchanges in those countries. The Stock Exchange serves as a conduit where those emotions and sentiment are expressed. It allows investors to make informed choices and also participate in the financial achievements of the companies (and indeed countries) whose shares they have chosen to be part of, providing the channel for ease of entry or exit by the investor.
Investors make money through dividend payment, bonus shares allocation and capital appreciation of their initial investment. However, poor performance in most cases translates to downward movement in stock prices, unless the company is able to provide rational reasons for this. Investors are mostly pressured to sell their holdings, in some cases at a loss, as stock prices drift southwards, in order to ‘cut their losses’.
The Reign of the Robots
In modern markets, trades are conducted electronically using computers. Almost all equity Exchanges have auctions and continuous trading sessions, where buyers enter competitive “bids” and sellers enter competitive “offers” and a matching algorithm crosses the orders based on some parameters such as price, time of order entry and quantity of the order.
For an investor to buy and sell shares in Nigeria, s/he must register with a stockbroker who in turn opens an account with the Central Securities and Clearing System (CSCS) with a unique identity. This qualifies the investor for voting, synonymous with a voter’s registration card in a political system or the PVC (Permanent Voter Card), as it is known in Nigeria.
The Automated Trading System of the Nigerian Stock Exchange, X-Gen could be likened to a Polling Booth with three major components – the Trading Workstations, the Trading Engine and the Message Handling System (MHS).
In order to reduce the likelihood of human error and ensure that a large amount of orders can be processed and matched at sub second level (nanoseconds), markets often employ a number of high performance machines and associated software to carry out its processing and ensure accuracy of its operation.
The trading engine collects all the valid orders i.e. offer (sells) and bid (buys) from the floor, remote trading offices of Stockbrokers, branches of the Exchange and investors using their smartphones, tablets or computers to transact through their Stockbrokers and the orders are matched and executed following these sequence of priorities: price and time of entry algorithm, in the similitude of what is done at the Vote Collation Center of an election process, to arrive at the logical conclusion on who won the vote. This result is transmitted online, real time via financial news providers such as Bloomberg, Reuters, the Nigerian Stock Exchange website, market data vendors and the wider media.
Your Vote Matters
At the end of each trading session, just like voting, the trading results of the market are made available daily on the Exchange as displayed by various indicators of which the chief is the “All Share Index” – which mirrors the direction of all prices of stocks in a market and used as a shorthand by investors to measure the performance of a stock market.
As mentioned earlier, just like the INEC is the constituted regulatory body for conducting elections, a Stock Exchange, being a self-regulatory organization, regulates her dealing members. INEC also has a set of rules that governs all the stakeholders – from the politician to the ordinary voter, in the same manner, the NSE has set of rules that guides all stakeholders and participants in the market. “Our word is our bond “is a market slogan often used by Stockbrokers to remind stakeholders of the virtue of integrity in the market place. In terms of discipline and enforcement, both organs have defined function lines that ensure enforcement of laid down rules. For instance, in the market and as well as in the electoral framework, there are special panels and tribunals for addressing disciplinary issues and resolving aggrieved participants. A voting system enforces rules to ensure that only valid votes are counted and aggregated to yield a final result.
Before elections, candidates of various parties are expected to go on campaigns where they unveil their manifesto to the electorate – publicly disseminating their individual scorecard in facts and figures. In the same manner, all listed companies must submit to the Exchange all material facts, financials, forecast and other news like facts behind their offers for transmission to the investing public to enable them make informed decisions on whether to invest or divest from the security. All companies are also mandated to disclose their security trading policy indicating the close period by which the related parties are precluded from trading in the shares of their company. This measure is to ensure information equity and prevent insider dealings.
Typically, the Stockbroker would have advised their clients on securities to invest in/divest from, prior to the client issuing a mandate, based on technical and/or fundamental analysis on information surrounding the particular security. Investors purchase shares (or securities) of a company with the view that the company has strong future prospects. While making their investment decisions, Investors are typically concerned with a number of factors but the top two often considered by most are:
- Value – Investors consider whether a security represent good value.
- Success – Investors measure the future of a security (or company) by looking at its financial strength and evaluating its future cash flows. These factors can be determined through analysis of the company’s financial statements along with a look at industry trends that may define future growth prospects and the pedigree of its leadership. In the case of a sovereign security, investors would typically use the growth rate of the economy, unemployment figures, security, balance of payment, gross domestic product and level of budget deficit as indicators.
The Market Voting Process
Accreditation begins in the morning, much similar to the ceremonial bell ringing (or gong ringing as is the case at the Nigerian Stock Exchange) on the floor at 9:30am, heralding the pre-open session. Note also that the system opens a log on the point of login by the Stockbroker as every broker that has been validated to trade by the Exchange has a unique username and password. The log captures time of entry, volume, account numbers and automatically assigns ticket numbers to the matched trades. In addition, it also captures the time any order was amended, cancelled and edited and the name of the executor. This is to facilitate a comprehensive and independent market surveillance process and provide audit trails, for playing back market activities, in order to resolve disputes or provide evidence which may be required in the event of a market infraction to secure a disciplinary conviction.
The order books are filled by the Stockbrokers in consonance with the mandates of the clients and queued on the system. A valid order must have the following features: Price, Volume and the client’s account number duly verified by the system. Voting (matching of orders) currently begin at 10:15am, immediately after the opening auction, and the process continues until 2:30pm when the Closing Bell (or Closing Gong in our local setting) sounds, signaling the close of all trading activities for the day.
For a trade to occur, the system establishes a price equilibrium on both sides of the order i.e. the bid and offer. It generates a ticket number for that trade with a time stamp. Thus, the trade becomes valid. An SMS message from the Exchange’s notification infrastructure, known as X-Alert, is triggered into the mobile telephone handset of the investor, detailing sales or purchases made and specifying the volume and price of the transaction. In the event that the investor did not authorize the transaction, he can summarily abort the process by placing a call to the NSE. Reports are also released immediately at the end of the day as brokers communicate the day’s transactions to their clients.
In Nigeria, aggrieved clients may seek for redress using the disciplinary process starting from the Nigerian Stock Exchange to the Securities and Exchange Commission (SEC) and the Investment and Securities Tribunal (IST).
The Stockbrokers could be likened to the Electoral College; a group of professionals licensed by the Exchange and chosen by the people (investors) to vote for the candidate (securities) of their choice. The SEC (the Apex Regulator of the Nigerian Capital Market) and the Nigerian Stock Exchange are the umpires that watch and regulate the entire trading activities just like INEC. The contestants here are the Bears and the Bulls.
Feeling Bullish or Bearish?
A common colloquial expression in the market is the relation of market sentiments to bears and bulls. The thought of facing a raging bull or a grizzly bear sound all too dangerous – and so are extreme market sentiments – but from a market perspective, a bullish market indicates that investors are confident about the outlook of the securities in the market and express this by increasing their trading activities. Prices consequently go up and so do the indices. A bearish market is the opposite, with lower confidence levels prevailing and prices falling. Technically, a bear market is defined as one where prices have declined by 20% or more over 20 consecutive trading sessions.
The use of the terms “bull” and “bear” to describe markets came from the way the animals attack their opponents. A bull thrusts its horns up into the air while a bear swipes its paws down.
Conversely, good corporate news emanating from companies could influence investors’ decisions over time. For instance, in July 5, 2012 Livestock feeds Plc was highly on offer (sale) during the pre-open session of the market. However, the order book changed during the continuous trading session when news hit the market that Livestock Feeds Plc notified The Exchange that it has signed a Memorandum of Understanding with UACN Plc, one of the listed blue-chip companies, on plans to make an equity investment in Livestock Feeds Plc . Within seconds, the order book changed in favor of the buy side. The stocks became the toast of the market as everyone was bidding for it. This kind of information flows seamlessly from the Issuers’ Portal of the Exchange to the Exchange’s website and the trading engine almost at the same time to facilitate equitability in access to information by all investors. The price movement is shown on the graph below 2012:
Electorates vote for candidates that they believe will deliver the “dividends of democracy” and would cast the majority of their votes to the candidate they think will deliver these goodies. Similarly, investors also react positively to companies that deliver on dividend promises or other favourable corporate actions. Recently, in March 6th 2015, Zenith International Bank Plc announced a dividend of N1.75, the price edged up by 10.21%, which was the maximum for the period as represented below:One of the challenging areas to measure or determine is the behavioral pattern of investors. We have activist investors and return seekers. Activist investors want to effect a change in a company or the company’s corporate governance just like some voters may want a change in government. While, return seekers are investors who look for opportunities in the market to make money. Return seekers seek to find undervalued or overvalued investments and take advantage of it. They are not necessarily interested in the corporate governance – much the same way some voters may cast their votes for candidates they can obtain instant gratification from. There are also investors classified as long term investors. These look out for hidden values, are not fazed by short term movements and are concerned with the overall direction of companies they invest in over the medium to long term.
Counting and Watching the Voting Trend
In the political process in Nigeria, having secured the majority of the total votes cast, the winner must in addition have 25% of the total number of votes in two-thirds of the Nigerian states. In essence, the winner must be popular among the Nigerian populace. In the same manner, you cannot move the price of a stock in the market without placing a minimum of 50,000 units of the stock for stocks trading below N100 or a minimum of 10,000 units for highly priced stocks trading over N100.
How does one tell the direction of the market at any point in time during a trading session? Is the market bearish or bullish? A synonym to the voting system is taking a post voting pool before the close of the pooling booths on how the candidates are faring. Here comes the market indices. The indices mirror changes in prices of individual stocks and work like a summary of the market by tracking all the stocks within the market in their various sectors. Keep in mind that there are different indices and each represent a pool of stocks. However the All Share Index, as earlier highlighted, represents all equity based securities on a market and so measures the changes in their prices.
Thus, the stock market acts as a voting machine, driven by investors’ sentiments. It is the investors that give value to each stock relying on the underlying information that surrounds it. When people talk about the market going up or down, turning bullish or bearish, they are referring to the market as seen through the lenses of indices while the index represent values of pool of stocks given by investors.
Do the Right Thing – Vote!
As a financial barometer, the Stock Market has become an integral and influential part of the financial decision making process for everyone from the common man to the wealthiest businessman. Much in a similar manner to the voting system in a democratic process, allowing people to decide not just their economic destiny but their social and security wellbeing amongst others.
Although voting is a choice, it is a rather important exercise in our national lives as it not only charts the course for the present; but also lays the prosperity foundation for future generations. So also is investment in the stock market if we want to prosper and create enduring wealth. Choosing not to invest is choosing not to be part of the future. Election transparency is the public ability to see and verify each essential step in elections: who can vote (investor), who did vote (investors’ accounts), counting and releasing of the results (Daily Official List) and the integrity of the votes (audit logs and market surveillance). Similarly, these steps are entrenched by the Nigerian Stock Exchange in all her operations to safeguard and protect the investor.
The facts that the transparency of the process of trading, price discovery/movement and determination at the Exchange is verifiable and reliable have not gone unrecognized by the international community. Furthermore, her quest for innovation, effective monitoring, supervision, surveillance and strong regulation have continued to improve the confidence of both local and foreign investors, and elevated her to be admitted as a full member at the World Federation of Exchanges (WFE). The statistics and reports released daily from the Exchange after each trading session are transparent and verifiable at each point in time. Thus, promoting the spirit of sportsmanship between the ageless candidates – the Bulls and the Bears.
Finally, to conclude this part of an ongoing article, there is one phrase that is often used, which brings the entire stock market and political system together that all Nigerian investors would pay a premium for – it is for everyone in the country to benefit from the “dividends of democracy”. That can only be achieved by participating in the market and of course, the elections.
And by the way, should you wish to cast your economic vote that will earn you long term enduring wealth and economic dividends, please contact a stockbroker on http://www.nse.com.ng/dealing-members/find-a-dealing-member/dealing-member-directory.
Ade Bajomo and Kenneth Ohaeri
Mr. Ade Bajomo is the Executive Director of The Nigerian Stock Exchange for Market Operations and Technology
Mr.Kenneth Ohaeri is a Market Analyst in the Market Operations Department of the Nigerian Stock Exchange
