SECURITY VALUATION PRACTICE OF INVESTORS IN NIGERIA
The research paper examined how investors valuate their securities. Specifically, the research looks at the valuation of stocks (both common and preferred) and bonds. Security valuation is of paramount importance in investment analysis, capital budgeting, financial reporting and so on. The research therefore, advice Investors to pay more attention on the valuation process more than ever before, due to the illiquidity of the markets. Due to the time factor, the research was conducted as a literature based. The research identified two sets of ratios as the basis for valuation practices of stocks and bonds. Stocks are valued by investors using one or more of these ratios: Profitability ratios, Liquidity ratios, Debt ratios, Asset-utilization ratios and Market value ratios while some of the ratios that help bond investors evaluate their investment are: Debt/Equity ratio, Debt/Cash flow ratio, Debt coverage ratio, and Cash flow/debt service ratio. The research found out that the use of ratios is the major way investors can keep track of their current and prospective investments. Some recommendations were infer as: investors should make themselves conversant with the use of ratio analysis for them to evaluate their securities timely and accurately or hire professional valuers to analyses the riskiness and return of particular security to determine whether it is overpriced, underpriced or correctly priced before he decides on to buy or sell.
Key words: Securities, Valuation, Bonds, Stocks and ratios
The operation and performance of a business depends on many individuals or collective decisions that are continually made by its management team. Every one of these decisions ultimately causes a financial impact, for better or worse, on the condition and the periodic results of the business. In essence, the process of managing involves a series of economic choices that activates movements of financial resources connected with the business (Helfert, 2011).
Financial analysis is carried out by both internal management and external groups. Firms would perform such an analysis in order to evaluate their overall current performance, identify problem/opportunity areas, develop budgets and implement strategies for the future, whereas, External groups (such as investors, regulators, lenders, suppliers, customers) also perform financial analysis in deciding whether to invest in a particular firm, whether to extend credit and so on (Russel, 2004).
The research paper examines how investors valuate their securities. Specifically, the research will look at the valuation of stocks and bonds. Security valuation is of paramount importance in investment analysis, capital budgeting, financial reporting and so on. Securities are categorised into equity securities, debt securities and derivative contracts. But in this research equity (common and preferred stocks) and debt securities will be look into.
Valuation of securities has been a revolving issue for many years, but as the markets have seized up, pricing become more difficult and time consuming. Securities are suffering from lack of liquidity. Today, less trading activity in securities is witnessed. Investors are therefore advice to pay more attention on the valuation process more than ever before due to the illiquidity of the markets.
The rest of this paper is organized as follows, review of related literature in section two and conceptual framework in section three, while conclusion and summary of findings will conclude the paper.
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Tag:and Cash flow/debt service ratio, Asset-utilization ratios and Market value ratios while some of the ratios that help bond investors evaluate their investment are: Debt/Equity ratio, Debt coverage ratio, Debt ratios, Debt/Cash flow ratio, investor, investor security practice], investors], Liquidity ratios, profitability ratio, securities, security valaution practices in nigeria, Stocks are valued by investors using one or more of these ratios: Profitability ratios