In Ghana, the most common type of equity investment is owning common stock issued by a corporation. Companies sell common stock to investors to raise funds for purchasing new assets, expanding their operations and pursuing new investment opportunities. Most large companies list their common stock on national and global stock exchanges to make it more liquid and easily tradeable. This enables them to raise funds more efficiently and quickly than if their stock was not listed. To be listed on a major stock exchange in Ghana, the company must be a public company and must comply with specific regulations set by the Securities and Exchange Commission (SEC), which governs its activities. The company must make certain types of reports available to the public on a periodic basis through the Ghana Stock Exchange, including quarterly and annual financial statements and the disclosure of major items, assumptions and events pertaining to the company’s financial condition and operations. These disclosures are often reviewed or audited by third-party accounting firms.
Private companies in Ghana choose not to become public companies and, therefore, cannot list their stock on the Ghana stock exchange. They are not required to disclose as much information to investors, have their financial statements audited and published, or comply with specific exchange and SEC regulations. Some private companies choose to remain private because they do not want to bear the costs associated with being a public company, such as paying audit firms, lawyers and other third parties to meet regulatory requirements. This is especially true for smaller entities. Some companies choose to remain private until they become large enough that becoming public and listing their stock on a major stock exchange is more cost-efficient. When such a company becomes public and lists its stock for the first time, this is called an initial public offering (IPO).
In Ghana, private companies are generally considered more risky than similar public companies due to the greater liquidity and disclosure that public companies tend to provide. Public companies can usually raise capital faster and cheaper than private companies. Public companies are also usually much larger than private companies, but there are exceptions. There are many large and stable private companies; and some private companies are substantially less risky than other public companies. Specific features of a particular entity will increase or decrease its risk profile.
Risk
Investors can lose money in stocks if the value of the stock drops. This can happen due to various reasons, such as poor financial performance of the company, industry-wide downturns, or changes in market sentiment. Additionally, if an investor sells a stock for less than what they bought it for, they will also realise a loss.
Investing in stocks carries a certain level of risk, and investors can potentially experience losses for several reasons:
- Company performance: If the company whose stock an investor holds performs poorly, such as reporting weak financial results or facing operational challenges, the stock price may decline. Factors – such as declining sales, profit margins or market share – can negatively impact investor sentiment and lead to a decrease in stock value.
- Economic conditions: Stocks are influenced by broader economic conditions and market trends. During an economic downturn or recession, investors may become more cautious, leading to a decrease in stock prices across various industries. Economic indicators, such as GDP growth, interest rates, and consumer sentiment, can impact investor confidence and affect stock market performance.
- Market sentiment: Investor psychology and market sentiment can significantly impact stock prices. If there is widespread pessimism, fear or uncertainty in the market, investors may sell their stocks, causing prices to decline. Conversely, positive market sentiment and optimism can drive stock prices higher.
- External factors: Various external factors, such as geopolitical events, regulatory changes, natural disasters, or unexpected events, can impact stock prices. These factors can introduce volatility and uncertainty into the market, potentially leading to stock price fluctuations and potential losses for investors.
- Selling at a loss: Investors can realise losses if they sell their stocks for less than what they originally paid for. This can occur if investors make hasty or emotional decisions, such as selling during a market downturn or reacting to short-term fluctuations without considering the long-term prospects of the company.
It’s important for investors to carefully assess the risks associated with investing in stocks and diversify their portfolios to mitigate potential losses. Conducting thorough research, analysing company fundamentals, and understanding market trends can help investors make more informed investment decisions and manage their risk exposure effectively.
The writer is an Economic Policy & Financial Analyst
