By Babajide Komolafe
In the last edition, we highlighted one of the options available to small investors who want to invest in the stock market, namely indirect investment through equity-based mutual funds.
Another option, and the most common, is to invest directly through the assistance of a stockbroker.
Stockbrokers are professionals licensed to buy and sell shares in the stock market on behalf of investors. Allowing all investors to trade directly with one another would result in chaos and other operational challenges.
Hence, transactions in the stock market are conducted through stockbrokers.
In Nigeria, stockbrokers are licensed and regulated primarily by the Securities and Exchange Commission, SEC, and, secondly, by the Nigerian Exchange, NGX. They earn income by charging commission or fees, which are usually a small portion of the value of each transaction.
The first step in buying shares through a stockbroker is to choose a licensed firm and open a stockbroking account. The list of licensed stockbrokers is published on the websites of the SEC and NGX Group. The registration process is similar to opening an account with a bank.
Once the stockbroking account has been opened, the next requirement is to create a Central Securities Clearing System, CSCS, account and obtain a Clearing House Number, CHN.
The CSCS serves as the central depository for all shares, bonds and other securities in the Nigerian capital market. It stores these securities in the names of their owners and also handles the clearing and settlement of transactions.
All buying and selling of shares must therefore pass through the CSCS for proper documentation and settlement.
The CHN is a unique number that identifies each investor in the Nigerian capital market. The CSCS can be likened to a bank, while the CHN functions like a bank account number. Ownership of shares is recorded and traced using the CHN within the CSCS system.
An investor cannot directly open a CSCS account. The stockbroker handles this process after the stockbroking account has been created.
After the CSCS account and CHN have been issued, the investor completes a stock purchase form, indicating the shares to be bought and the preferred price. Alternatively, the investor may allow the stockbroker to decide on the purchase price.
The next step is payment for the shares, which is made into the bank account of the stockbroking firm. It may take a few days for the broker to execute the transaction. Once the shares are purchased, the investor is notified, often via SMS or other communication channels.
Finally, the investor is advised to visit the CSCS website to access the account and confirm that the shares have been credited in his or her name.