In Botswana, where financial literacy is low, retail investors are like a herd of cattle. The market is big, fast, and sometimes confusing. But not all cattle know the way, as long as there are shepherds: fund managers help figure out the right price for shares and ordinary Batswana who are taking part in the stock market aren’t being left out in wealth building.
On the Botswana Stock Exchange (BSE), the stock price is just the last price that someone agreed to pay for a share. It’s not a fixed number; it moves based on what buyers are willing to pay and what sellers are willing to accept.
For example, Sechaba Brewery Holdings was recently quoted at P37.00. That means the last trade, between a buyer and a seller, was agreed at that price. But tomorrow? The price might be higher or lower, depending on what people think it’s worth.
But How Do They Know What It’s Worth?
You have probably heard that stock prices are driven by supply and demand. That’s true, but also vague. What actually drives supply and demand?
Publicly traded companies like Sechaba are owned by many different people; some are experienced investors, others are just getting started. The total number of shares is known as “shares outstanding.” In Sechaba’s case, that’s 110.6 million shares.
When you buy 100 shares, the common lot size, you now own a piece of the business. That means you are entitled to a portion of the company’s profits: dividends – the money companies pass to shareholders.
Read: Shares Are For All and What Are You Really Paying For
Where Do Dividends Come From?
Sechaba owns Coca-Cola Beverages Botswana and Kgalagadi Breweries Limited. They sell products, like your favorite pint of beer or soda. They collect money from customers, pay their workers, reinvest in equipment, and settle their bills. Whatever is left, free cash flow, can be paid back to shareholders as dividends.
Read this to understand the impact of cash flow on dividends: Sefalana’s Till Feels the Pinch — and So Did Payout To Investors
So if you own a share, your return depends on how much cash Sechaba makes in the future, not just today.
For the sake of illustration, let’s assume that Sechaba will make P4.42 billion in free cash flow over the next 30 years. Divide that by 110.6 million shares, and each share would bring in P40 over this time period.
This P40 is called the future value. But think about this: would you pay P40 today for a stock that will slowly pay you P40 over the next 30 years?
Seasoned investors don’t. Because that’s not investing, that’s just breaking even.
So What Would They Pay?
Investors want a return, a reward for taking the risk of investing in a company. They work backwards using a method called discounting.
Assume you want a 10% return over the next year.
You take the P40 future value and divide it by (1 + 10%) = 1.10
P40 ÷ 1.10 = P36.36
That means what most investors should pay today is P36.36 if they expect P40 back in a year and want a 10% return. This P36.36 is called the intrinsic value—what the stock is truly worth to you.
So while the market price (P37.00 of Sechaba) is based on what people are paying, the intrinsic value is based on what the stock is really worth based on expected profits. Remember, calculations depend on how long you hold the investment and the return you want.
But Who Calculates All This?
Retail investors, ordinary people like you and me, often skip this analysis. Big investors—like pension funds, insurance companies, and asset managers—do this math all the time. They do not buy a stock unless it’s below their estimated intrinsic value. You will hear words like undervalued and overvalued a lot from them. But this is all subjective, depending on their analysis.
Read Part 2: Money Managers Are Helping Keep Your BSE Shares Up
Read also:
