Float

When you think about buying shares of a company on the Nigerian Exchange (NGX), what you're actually purchasing is a small piece of that company. But not all shares are created equal. Some shares are held by insiders, such as company executives and major stakeholders, while others are held by the government or locked up due to agreements. The shares that are left for regular folks like you and me to trade are what we call the "float." Essentially, the float represents the number of shares that are actually available for public trading. For instance, if a company has 1 billion shares in total but 900 million are held by insiders and the government, then the float is 100 million shares. This means only 100 million shares can be bought and sold on the open market.

In Nigeria, where the stock market is a popular avenue for investment, understanding the float is crucial. A company with a small float might see its share price move dramatically with relatively small trades because there aren't many shares available. This can be risky because it means the stock might be less liquid, making it harder to buy or sell shares without affecting the price significantly. For example, if you're buying shares of a popular company like MTN Nigeria, which has a large float, you'll find that its share price changes less dramatically with each trade compared to a smaller company with fewer shares available for trading.

The Central Bank of Nigeria (CBN) also influences the stock market through its Monetary Policy Rate (MPR), which is currently around 27.50%. This rate affects the cost of borrowing and the overall liquidity in the market. When the MPR is high, it can discourage investment in stocks because the returns might not justify the risk, especially if the float is small. Moreover, dividends from these shares are subject to a 10% withholding tax (WHT) and a 10% capital gains tax (CGT) if you sell the shares at a profit. This means that the actual returns you take home will be less than the dividends paid out by the company or the profit from selling the shares.

Government and institutional holdings can also impact the float. Sometimes, the government might own a significant portion of shares in a company, especially in sectors like banking and telecommunications. These shares are often not available for public trading, thereby reducing the float. For instance, if the government holds 500 million shares in a company, only the remaining 500 million are available for you to buy and sell. This can make the stock less liquid and more volatile.

Why it matters: Understanding the float is essential for Nigerian retail investors because it directly impacts the liquidity and volatility of a stock. A smaller float means the stock could be more volatile and less liquid, making it harder to buy or sell without affecting the price. Knowing this helps you make more informed decisions about where to invest your money, especially when considering factors like the CBN's MPR, withholding tax on dividends, and capital gains tax on profits. By being aware of the float, you can better navigate the complexities of the Nigerian stock market and aim for more stable and profitable investments.