Investment is often a subject of conversation amongst many people with a monthly income who wonder where to invest their savings or outstanding earnings after setting aside funds for living expenses. Read on to learn about various investment options you could use to build your wealth.
The question then requiring consideration is:
What is the meaning of Investment? Among many definitions that can be found in books and on the Internet, a simple explanation of investment is that it is deferred consumption, which involves purchasing an asset, giving a loan or keeping funds in a bank account with the aim of generating future returns. Various investment options are available, offering differing risk-reward trade-offs. When one understands the core concepts of investing and follows through with thorough analysis of available investment options, an investor can maximize returns while minimizing risk exposure.
There are many investment options available but we will focus on Cash Investments, Debt Securities, Mutual Funds, Stocks or Equities, and Real Estate:
These are short-term investments whereby cash is deposited and returns are received on such within the short period agreed usually a year or less. Its name derives from the fact that such investments can quickly be converted to cash if necessary. These include savings bank accounts, certificates of deposits (“CDs”) and treasury bills. This investment option pays low rate of interest and can be risky in times of high inflation. In Nigeria, there are a lot of cash investment instruments available such as Bankers Acceptances (“BA”), Promissory notes and Commercial Papers. These instruments are
traded by money market dealers such as banks and discount houses. What other investment options are currently available within the Nigerian Market?
These are interest-paying bonds, notes, bills, or money market instruments that are issued by governments or corporations. Some debt securities pay a fixed rate of interest over a fixed time period in exchange for the use of the principal. In such investment options, the principal, or face value, is repaid at maturity. Some are pass-through securities, with principal and interest repaid over the term of the loan. Still other issues are sold at discount, with interest included in the amount paid at maturity. This form of investment is safer and is less risky compared to buying stocks. Of note however is the fact that returns are generally lower than other securities.
Stocks or equities
This is an instrument that signifies ownership position or represents a claim on one’s proportionate share in the corporation’s assets and profits. A person holding such an ownership in the company does not enjoy the highest claim on the company’s earnings. Rather, such stock holder’s claim is subordinated to that of a creditor, and the equity holder will only enjoy distributions from earnings after these higher priority claims are satisfied. Stock or equity investments are riskier than bonds or debt security investments. Before investing in stocks, one needs to do thorough research on the company of interest or employ the services of professionals such as asset management houses to avoid exposure to very risky companies.
Mutual funds are professionally managed collective investment schemes that pools money from many investors and invest typically in investment securities such as stocks, bonds, short-term money market
instruments, other mutual funds, other securities, and/or commodities such as precious metals and crude oil. The mutual fund should have a Fund Manager that trades (i.e. buys and sells) the fund’s investments in accordance with the fund’s objectives. There are different kinds of mutual funds based on the type of instruments such funds are invested in. Mutual funds may be bonds based such as the Stanbic IBTC Bond Fund, stocks based such as the Stanbic IBTC Nigerian Equity Fund or even Money Market based such as the Stanbic IBTC Money Market Fund. Some of the advantages of investing in mutual funds include:
Diversification: A single mutual fund can hold securities from hundreds or even thousands of issuers. This diversification considerably reduces the risk of a serious monetary loss due to problems in a particular company or industry.
Affordability: You can begin buying units or shares with a relatively small amount of money. Some mutual funds also permit you to buy more units on a regular basis with even smaller installments.
Professional management: Many investors do not have the time or expertise to manage their personal investments every day, to efficiently reinvest interest or dividend income, or to research the thousands of securities available in the financial markets. Mutual funds are managed by professionals who are experienced in investing money and who have the education, skills and resources to research diverse investment opportunities.
Liquidity: Units or shares in a mutual fund can be bought and sold on any business day (that the market is open), thus providing investors with easy access to their money.
Flexibility: Many mutual fund companies manage several different funds (e.g., money market, fixedincome, growth, balanced, sector, index and global funds) and may allow you to switch between these funds at little or no charge. This enables you to change your portfolio balance as and when your personal needs, financial goals or market conditions change.
This is usually residential real estate that one purchases with the intent of earning from it. Hence real estate investment is real estate purchased with the intent of renting it, selling at a higher price, or using for almost any purpose other than using it as a residence. Common examples include apartment buildings and second houses. Real estate investment is often taxed differently from other real property. For example, one may not be able to deduct the interest paid on a real estate investment mortgage. Instead it involves long-term commitment of funds and gains that are generated through rental or lease income as well as capital appreciation.
However, the question that may arise would be: can someone without large capital invest in real estate? The answer to that would be yes since this can be done via investments in Real Estate Investments Trust commonly known as REITs. A REIT is a corporation or trust that uses the pooled capital of many investors to purchase and manage income property (equity REIT) and/or mortgage loans (mortgage REIT). REITs are traded on major exchanges just like stocks. They are also granted special tax considerations. REITs offer several benefits over actually owning properties. First, they are highly liquid, unlike traditional real estate. Second, REITs enable sharing in nonresidential properties as well, such as hotels, malls, and other commercial or industrial properties. REITs do not necessarily increase and decrease in value along with the broader market. Additionally, they pay yields in the form of dividends no matter how the shares perform. REITs can be valued based upon fundamental measures, similar to the valuation of stocks, but different numbers tend to be important during valuation of REITs than for stocks.