DONT BUY SHARE WITHOUT THESE FACTOR

Don’t buy shares without considering these factors Chris was offered an opportunity to be a part owner of a cyber café with his uncle, who decided it was time to retire and move back to his village. The purchase price was agreed between both parties and Chris had also taken stock of the assets that he will soon be taking over. However, Chris wasn’t still done with his due diligence. Even though he knew the business had been in existence for years and appeared profitably, he still felt he needed much more. Investing in shares should basically follow the same approach. Beyond just relying on fundamental and technical analysis, a lot more due diligence must be carried out before you decide to invest in shares. These are examples; CEO and management team: Warren Buffet was once quoted as saying he invests in companies that can be run by a stupid person because one day, a stupid person will run that company. The operations of any company are carried out by a management team led by its Managing Director/Chief Executive Officer. A CEO is one of the most important criteria any investor must consider before investing. You should make efforts to know who is running the business, their vision, antecedents and charisma before deciding to invest. It’s the same thing you would do if you were to vote for a president; so why not do the same for a company you hope to be a part owner of. Most failed business or bad investments have often been a result of bad leadership. A great company is always represented by a great leader. Board of directors: The board of directors of any company is bestowed with the responsibility of overseeing the business activities of the company on behalf of its shareholders. This basically puts the directors squarely at the helm of affairs in any company. A weak board is a sign that the management of the company can basically get away with anything it wants, which more often than not is not in the best interest of shareholders. An irresponsible board of directors can be inimical to your investments in many ways, which is why you must make efforts to identify who the members of the board are. You should also search online for news related to their activities and pronouncements in the past. These are clues to how they have managed the business and indication of how they will continue to manage the business. Competition: Before investing in a company, you must ascertain where it stand against their competitors. Is the business in a highly competitive environment? What is the barrier to entry and how strong is the company’s brand? These are all important factors you must consider before giving your stockbroker your money. For example, Companies in highly competitive industries are mostly susceptible to low margins and low profitability. Therefore, if you invest in a company that gets easily outdone by competition, the company loses market share and then profit declines, leading to a diminution of your investments. Companies in industries that have a high barrier to entry may often appear to be uncompetitive and good for investment. However, that on its own does not determine viability. Such industries may also be so capital-intensive that it will take years for the companies to break-even, making it unattractive for others to join. Whatever the case is, companies that constantly beat competition year after year and possess superior products are better investments than others who aren’t. Brand integrity: You must also identify the brand power of the company and its image among its consumers. Businesses that are easily recognisable and known to all find it easier to sell products. Companies with strong brand power can also effectively control price, which is a very important factor in maintaining market share and guaranteeing growth. A company that can increase the price of its products or services without much fear of losing its customers to the competition is likely an attractive buy for most value investors. Regulatory environment: Recently, the Central Bank of Nigeria twice increased the cash reserve requirement of bank’s public sector deposits. This sent shock waves down the spines of the banking sector, leading the banking index to plunge 18 per cent year to date in 2014. These are examples of regulatory pronouncements that can affect industries. It is therefore important for you as an investor to understand the regulatory idiosyncrasies affecting an industry/company before making that investment decision. Information such as the law guiding the industry as well as its regulatory framework, the official in charge and penalties for breaches are examples of what you must have knowledge of. Taxes and incentives: The difference between the profitability of two companies can often be how efficient their tax structure is. For example, Dangote Cement has posted over N400bn in profits in the past three years, but has not paid any corporate tax because it is a designated pioneer company. While this may not be an automatic advantage, it is still a strong indicator of where and when to invest. Incentives that minimise tax, duties and levies, create extra cash flow which companies can put to better use to maximise shareholder value. Other factors to consider are ownership structure, employee welfare and manpower development, technology, micro and macro-economic activity and political stability.