Me and my Money !!!!!!

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.

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 Investements, Debt Securities, Mutual Funds, Stocks or Equities, and Real Estate:

Cash investments

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?

Debt securities

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

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.