The Hidden Stock Metric 90% of Investors Never Check

FUND MANAGER SERIES: THE PARAMOUNT FUND (EQUITY) · NOTE 2/5 

The Number Most Investors, Never Check Before Buying. 

A company can be worth hundreds of billions of naira and still be almost impossible to invest in. Here is the concept that explains why. 

Favour Tewogbade  ·  Chapel Hill Denham Management 

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You know that feeling when you spot a shop with a beautiful display, walk in full of excitement, and the assistant tells you everything in the window is reserved or sold out? The price tags are real. The products exist. But none of it is available to you. 

That experience has a direct equivalent in the Nigerian stock market. A company can carry a headline valuation of hundreds of billions of naira and still have very little of itself available for you to buy. Understanding why is what this note is about. 

WORD TO KNOW - NGX: Free Float: The percentage of a company's total shares that are genuinely available for public trading. Shares held by the founding family, a parent company, the government, or a long-term anchor investor are excluded. Free float is what is left, the slice you can actually buy and sell.

 

68% of Nigeria's Stock Market Is Locked Away 

Every listed company has a certain number of shares in existence. But not all of those shares are available for public trading. Across the top 30 companies on the NGX, the average free float is approximately 32%. That means on average, 68% of each company's shares are held by insiders and anchor investors who do not trade. 

 

The range is striking. Some companies on the NGX have free floats close to 99% — almost entirely in public hands with active daily trading. Others have free floats as low as 2% or 3%, meaning the shares quoted on your screen are almost never actually available to buy in any meaningful quantity.

Think of it like a block of flats in Ikoyi.: The developer keeps 25 units for long-term rental. A family owns another 15 and is not selling. Only 10 units are on the market. The building is worth a lot on paper, but the pool available to you is far smaller than it appears. That is free float in a nutshell. 

 

What This Means When You Try to Sell 

Free float is not just a buying problem. It is a selling problem. And selling is where most investors discover the trap too late. 

WORD TO KNOW - NGX: Liquidity: The ability to buy or sell shares at or near the quoted price, in a reasonable quantity, without moving the market against yourself. High liquidity means you can get in and out quickly at a fair price. Low liquidity means you may be stuck, or worse, your own selling pushes the price down before you can exit. 

 

Free float and liquidity move together almost perfectly on the NGX, the correlation between the two is approximately 92%. This is not a coincidence. If only a small proportion of a company's shares can be traded, daily transaction volumes in those shares will naturally be small. The price you see on your screen for a low-free-float stock may not be the price you can actually transact at. 

The Paramount Principle  Free float is the gateway to liquidity, and liquidity is the gateway to investibility. If a company cannot pass this test, we do not invest, regardless of how attractive the business looks on paper. 

 

The Reordering Nobody Talks About 

Here is something that will change how you look at the Nigerian stock market. When you rank NGX companies by headline market cap, the top names are well known. When you re-rank them by free float-adjusted market cap, that is what is actually investible, the order changes significantly. 

The three largest companies by headline market cap rank third, eighth and eleventh once adjusted for free float. The businesses most often cited as Nigeria's biggest are not necessarily the most accessible or the most investible. And in investing, accessibility is everything. 

FROM THE FUND MANAGER: "We do not just ask how big a company is. We ask how much of it is actually available to investors. Sometimes the answer to that second question changes everything." 

 

What to Take From This Note:

  Free float is the percentage of shares actually available for public trading. It is not the same as market cap. 

→  On average, 68% of shares in the top 30 NGX companies are locked away by insiders and anchor investors. 

→  A company with a low free float can be almost impossible to invest in meaningfully, regardless of how good the business looks. 

→  Adjusting for free float reorders Nigeria's biggest companies significantly. Famous names do not always lead on investibility. 

→  At the Paramount Fund, free float is the gateway test. Fail it, and we move on regardless of how attractive the business looks on paper. 

 

💬  YOUR TURN: QUICK QUIZ 

A company has a market cap of ₦200 billion but a free float of only 5%. What is the value of shares you can actually buy? 

☐  ₦200 billion — the full market cap 

☐  ₦10 billion — the free float portion only 

☐  ₦190 billion — everything except the founder's shares 

☐  It depends on the share price on the day 

Drop your answer in the comments below 👇🏾 

 

Coming in Note 3: once you know a company is large and its shares actually trade, the next question is whether you are paying the right price. The answer in Nigeria often surprises investors. 

Paramount Fund (Equity) Only holds positions where shares genuinely trade. 

Free float discipline is built into every investment decision at the Paramount Fund. It protects investors in good markets and in difficult ones. 

All returns in Naira terms, net of fees. Source: Chapel Hill Denham. Past performance is not a guarantee of future results. 

→  Subscribe to the Paramount Fund (Equity) on the InvestNaija app 

IMPORTANT NOTICE 

This document is issued by Chapel Hill Denham Management Limited, registered with the Securities & Exchange Commission, Nigeria (SEC), and fund manager of the Paramount Fund (Equity). It is for informational purposes only and does not constitute investment advice or an offer to buy or sell units of the Fund. Past performance is not a guarantee of future results. 

 

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