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Investing 101 for Nigerian Investors: Basics & Caution

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Investing 101
Investing 101

Inflation is a reality that affects everyone, as prices of commodities that we use in everyday life continue to rise every year. And the value of money depreciates as things become expensive.

Nigeria has been seeing double digit inflation since last 4 years, in September 2020 it was reported by National Bureau of Statistics that inflation was 13.71%.

To grow money and to beat the inflation, one needs to consider investing. Investing is increasingly becoming a necessity for those who do not want the value of their money to depreciate over time.

It is also growing in popularity worldwide – thanks to growing awareness among younger generation. The number of ways that you can invest your money is also growing and becoming more convenient and accessible. Retail investing, or investing by individuals, is now a common phenomenon in Nigeria.

Several investing apps and platforms are now available, through which you can invest your money in the type of investments that you want. Few examples include Chaka, Bamboo, Cowrywise, Rise etc.

In this article, we’ll discuss the basics of investing, types of investments, and things you need to know before starting your investing journey.

What is Investing & why is it Important to start investing?

Investing is about allocating your resources in some asset or business in expectation of future returns.

Without investing, there is no way you can grow the money that you have saved. Depending on how you save your money, you will either get no returns for your money if you save it as cash or you will get some returns at the prevailing savings account interest rate with a bank which can be around 3-5%.

This means that if you only save your money, after 10 or 30 years, you will have about the same money that you have today as the value of your money may decrease significantly over such long periods of time due to inflation, which means that you will be able to buy fewer things with your money in 10 or 30 years than you can today.

When you invest money, depending on how and where you invest, you are likely to get more returns and earn more money from your investments. Investing is the next step after Savings, which one must consider.

If you plan on investing your money, you should start investing as soon as possible. There are two primary reasons for this.

First, if you invest your money for a longer period of time, you will likely gain higher returns. Second, when you start investing, you simultaneously learn more about investing. This will make you a better investor over time and help you achieve your financial goals.

Types of Investment Instruments

There are several ways you can invest your money in Nigeria.

Since there are so many options available, you should consider your own needs, risk appetite and choose the type of investment that suits you.

  1. Savings & Fixed Deposit

Rather than saving your money at home, you may consider placing your money in a savings account. Savings accounts are available with almost every bank. They provide a nominal interest rate on your money. Even though this interest rate is quite low, it is one of the safest and most convenient options to save your money. The current savings account interest rate in Nigeria is around 1 – 3%.

If you have money that you won’t need for a long period of time, then you may consider placing that money in a fixed deposit. In a fixed deposit, you cannot withdraw your money for a given period of time (without incurring a penalty). A fixed deposit carries a higher interest rate than a savings account. The interest rate on a fixed deposit depends on how long the term of the fixed deposit is and can vary between 7% to 12%.

You can also save money with online saving apps like PiggyVest.

  1. Stocks & Indices

If you’re willing to take higher risk with your money, then investing in the stock market or indices is another option. Investing in the stock market means buying shares of companies and then selling them later at a higher price. You can invest in Nigerian companies that are publicly traded through the stock exchange NSE’s licensed brokers.

Investing in stocks is different from day trading. Day traders in the stock market make long or short bets on stock prices to take advantage of the daily price fluctuations in the stock market. However, an investor keeps the shares of a company for a relatively long period of time with the goal of profiting from the company’s growth or increase in market value.

Both day trading (speculation) and investing in stocks carry risk as shares of companies may get affected by various factors.

  1. Unit Trusts or Mutual Funds

If you want to invest in the stock market, but do not know much about stocks or the stock market, then investing in a mutual fund is a great option. Mutual Funds pool money from a high number of investors and use their expertise in the stock market to make investments or enter into trades.

There are several kinds of mutual funds. Some invest in only a specific sectors while others invest in a diverse range of securities, and so on. Each mutual fund has its own investment strategy. They charge a management fee for the service of actively managing and growing your money.

You can buy or sell units in these mutual funds on the NSE just like you would buy or sell shares. You can also use investing apps such as Cowrywise. Make sure that the mutual fund managers you choose are licensed by the SEC of Nigeria.

  1. ETFs

ETFs or exchange traded funds allow you to invest in the performance of an index or in a collection of assets. These ETFs make money if the index or assets perform well.

You can invest in a diverse range of assets through ETFs and gain market-linked returns. You also get the benefit of having professionals manage your investment rather than doing it yourself.

Through ETFs you can invest in global, country-specific, or asset-specific indices. Each ETF has its own investment strategy, so you should find out about the investment strategy of a particular ETF before investing your money.

For example, if you think blue chip Nigerian companies are going to perform well in the next five years, then you should invest in an ETF that invests in such an index or asset class. You can invest in ETFs on NSE.

  1. Bonds

Bonds are issued by Governments or by companies to raise money from the public. A bond will provide a fixed rate of return. Government bonds are considered safer than company bonds, since it is less likely that a Government will default on its commitment.

Different bonds have different time periods. Some bonds ask you to invest your money for a period of one year while others ask for twenty-five years.

Federal Government of Nigeria issues FGN Savings Bond which can be bought at auction from Primary Dealer Market Makers (PDMMs) or traded through exchanges like – FMDQ OTC Securities Exchange or NSE.

  1. Real Estate

Real estate is one of the most traditional ways to invest your money. The value of real estate generally goes up over a long period of time. Investing in real estate is a good option for those who have a large sum of money to invest.

To invest in real estate, you can either directly buy property available in the market, or you can invest in a Real Estate Investment Trust (REIT) on NSE. A REIT pools money from the public and uses it to invest in real estate or to develop properties.

Real estate investments are considered a safer option than investing in the stock market since the value of real estate is much less volatile. But one may lose money if Real Estate prices go in slump.

  1. Commodities

You can also consider investing in commodities such as agricultural goods, oil and gas, precious metals, minerals, and so on. Commodities are traded on the exchanges like NCX (Nigeria Commodity Exchange), Lagos Commodities and Futures Exchange or AFEX Nigeria.

You can take the benefit of the rise in the price of commodities by investing through the exchange. You do not have to physically own or keep such commodities when you invest through the exchange. There are two ways to invest in commodities, through futures and options or in the spot market.

  1. Alternate Instruments like Forex or Cryptos

Alternate instruments such as foreign exchange trading and cryptocurrencies are gaining in popularity in Nigeria. These are high risk instruments and are meant for experienced investors or speculators only.

Forex trading allows you to invest in the price movement of currencies. Some currency pairs are highly volatile and their movements can be difficult to predict. It can be very risky for beginner traders especially if you lack knowledge, use high leverage, don’t follow risk management & are unable to predict market conditions.

You can also invest in or trade cryptocurrencies such as Bitcoin or Ethereum. Cryptocurrencies are relatively new instruments and carry a higher degree of risk.

If you want to trade forex or cryptocurrency CFDs, then you can open an account with a reputed forex broker in Nigeria that offers CFD trading instruments.

What’s Important – Before You Invest

  1. Know Your Investment Period

Different investment options are meant to be used for different periods of time. For example, if you’re investing in real estate, then you should be prepared to hold your investment for decades. In contrast, you can trade stocks or commodities even for a single day or week as a day trader.

Hence, you need to educate yourself about the kind of investment periods that are associated with a particular investment option.

You should always decide the period of your investment before making your investment. It is always advisable to invest for the long term. When you invest in the long term, you minimize the risk that comes from short term price fluctuations.

Short term investments are usually more speculative in nature and carry a higher degree of risk.

  1. Know the Risks and Manage Them

You should always know the risks associated with your investment before investing. If you are investing in a highly risky instrument, then you should be prepared to lose your investment capital. Every type of investment carries its own type of risk and are subject to market fluctuations.

For example, when you invest in the stock of the company, there is no guarantee that the price of the stock will rise in the future. If the company starts to perform poorly and starts to lose its revenues, then that stock may become less valuable or even worthless in some cases.

Instruments like forex and cryptocurrencies are particularly risky.

There are several ways and techniques to manage the risks associated with your investment. If you’re buying a stock, then you should use a stop-loss. This means that you should sell that stock if it loses a certain amount of value.

Bottomline

In today’s economic environment, investing is crucial and a good way to build wealth over a longer period of time. Remember that investing is not a get-rich-quick deal, and you will need to invest your time as well in learning about the market and instrument in which you are investing.

If done well, investing can be highly rewarding and a good way for you to achieve your financial goals. But, always understand the risks of your investments and invest accordingly.

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