3 WAYS THE NIGERIA STOCK EXCHANGE COULD BOOST DOMESTIC INVESTOR INTEREST IN STOCKS

South African telecommunications giant MTN Group, which operates in 21 African countries, makes its biggest operating profit in Nigeria. Yet the firm is not listed on the Nigeria Stock Exchange (NSE), so Nigerians contribute immensely to the company's wealth but have no say in how it's run.

Similarly, none of the International Oil Companies (IOCs) in Nigeria have listed their upstream businesses, the most profitable part of their operations.

Why are are local and especially foreign companies so reluctant to list on the NSE?

The fundamental reason is that there are few investors to buy and sell their stocks.

According to Oscar Onyema, CEO of the NSE, there are 5 million investors on the bourse. Now, considering that over the past five years foreign investors have accounted for an average of 60% of daily transactions on the NSE, one can assume that at least 60% of the 5 million investors are foreigners.

This leaves only 2 million domestic investors in a country of over 160 million people - that's less than 2% of the population, compared to the U.S. where 54% of the population were stockmarket investors.

The NSE and the Securities and Exchange Commission (SEC) have commendably embarked on all kinds of reforms to encourage more equity listings on the NSE. What they haven't done is generate huge domestic investor interest in the market.

So who's going to buy and hold all the stocks when they list?

Foreign portfolio investors mostly hit and run, so the NSE can't depend on them for the long-term development of a highly liquid and sophisticated market. Domestic institutional investors, which form the bulk of domestic investors, are too few and too risk-averse to massively deepen the market.

Therefore, the NSE needs individual investors.

Here are three ways it could encourage more of them to enter the fray:

1. ONLINE STOCK BROKERAGE

I don't understand why you can't trade Nigerian stocks unless you go through an offline stockbroker.

Many of these stockbrokers do nothing but take buy and sell orders. At the extreme they hoard valuable insider information used as leverage in opaque dealings with unaware clients.

Stockbrokers who exist only to take transactional instructions offer no value. In fact, they are a dying breed across the world.

Most clients of stockbrokers already do the research behind their buy and sell decisions anyway, so why can't they have the option to directly transact online?

The NSE should compel stockbrokers to offer their clients an alternative online trading platform and should facilitate the provision of such platforms to overcome any technological barriers.

2. FOREIGN-INVESTED EXCHANGE TRADED FUNDS (ETFs)

At the moment there's huge interest from the international investment community in Nigeria's growth story. A few weeks ago, a new pure-play Nigeria ETF debuted on the New York Stock Exchange (NYSE).

Ironically, foreign investor interest in Nigeria has generated a reciprocal domestic investor interest in foreign equities.

Since foreign companies won't list on the NSE to give Nigerians direct access to their stocks, an alternative strategy that gives indirect access is NSE-listed ETFs that invest in foreign securities.

There's already a precedent somewhat with the December 2011 Absa Capital listing of the NewGold ETF - Vetiva Capital Management reportedly oversees the fund.

These foreign-invested ETFs could attract individual investors because they (investors or their stockbrokers) don't have to spend time and money to pick individual foreign stocks.

3. INDIVIDUAL INVESTMENT PROTECTION

In the U.S. the Securities Investor Protection Corporation (SIPC), a non-governmental non-profit founded and operated by broker-dealers, exists to protect small investors. The SIPC has been instrumental in encouraging individual investor participation in the U.S. stockmarket. Small investors know they can recover their cash and investments up to certain limits if a stockbroker goes bust.

Since individual investors mostly shun securities insurance offered by traditional insurance companies, the NSE could mandate its members to establish a SIPC-like protection for individual investors.

Obviously, protection limits have to be set to prevent a moral hazard of excessive risk taking by individual investors. Furthermore, individual investors could be required to post cash collaterals proportionate to their account values beyond protection limits.

CONCLUSION

There's just no way the Nigeria Stock Exchange (NSE) will grow if millions of individual investors don't invest in the stockmarket.

Nigeria's capital market regulators are making so much effort to attract equity listings to the NSE. However, the companies they're chasing know there are hardly any investors to buy and sell their stocks. Therefore, regulators should double-up on attracting more individual investors.

In any market, it's demand that drives supply, not vice-versa.

WHAT’S WRONG WITH NIGERIAN STOCK MARKET REPORTS?

The short answer is that they are useless for stock market investors.

Whenever I read a local newspaper report on market activity on the Nigerian Stock Exchange (NSE) I’m just frustrated. All you get is that the market gyrated by some basis points and who the gainers and losers were. That’s it.

There’s hardly any mention of what moved - or could have moved - the market or a stock. Nothing inspires or motivates you to look deeper into the market or a stock for possible investment. Nothing makes you curious about stocks or the stock market. It’s like the journalists are too lazy to write something insightful.

For example, look at the stock market report for Monday, February 11, 2013, from Nigeria’s Business Day. Now compare that report to this report for Tuesday, February 12, 2013 from Reuters on U.K. market activity. See the difference? Nigerian commentators don’t try to connect the dots for uninitiated readers.

It’s no different when I hear a market report on radio.

Maybe this lack of easily-accessible and insightful stock market information is why most Nigerians don’t care about investing in stocks, which remains one of the easiest and fastest ways to make money wherever you are in the world.

I’m amazed at the increasing number of Foreign Exchange (forex) trading seminar ads I see in Nigerian newspapers. I doubt Nigerians trade forex in droves. Nonetheless, if Nigerians can take to forex trading then they can take to stocks trading because the forex market is a lot more complex than the stock market and Nigerians love simplicity.

Nigerian stock market commentators and writers need to do more than report statistics. The Financial Times and The Wall Street Journal are dailies yet they certainly try to get behind the numbers.

The regulators should take note. There’s no point in the Central Bank of Nigeria and/or the Securities and Exchange Commission compelling companies to list on the NSE when a majority of Nigerians don’t have the financial education to invest in the stock market.

I became a self-directed investor in 2006 - a year after I got out of B-School in the U.S. At the time I knew nada about investing in stocks, other than what I’d learned at B-School.

I learned the basics of stock market investing mostly from reading financial dailies and periodic magazines – Fortune Magazine is great for investigative journalism. I also frequented educational sites like the Motley Fool (www.fool.com) and Investopedia (www.investopedia.com).

I was so excited about what I was learning that I started this blog to share as I learned.