An investment basically involves the purchase of an asset which is expected to yield income or profit in the future. Since there are different investment options out there, you need to weigh all your options carefully before laying down a kobo of your hard earned money. You may also borrow to make an investment, in which case you have to be extra careful, since you are not the only one involved.
It’s quite easy to spend on things that initially seem like sound investments, only to turn out to be liabilities. So, in this article, we will look at the 3 basic types of investments and you should consider them.
By the time we are through with this, you will be able to decide the options that are right for you.
Types of investment: We will group investments into lending investments, ownership investments, and cash equivalents. Let’s take them one at a time.
Lending investments: Lending investments are low-risk in nature. As a result, they also have low returns. It involves you lending your money to institutions or the Government and getting interest after a given period of time. Examples of such investments include bonds and your savings account.
[Read Also: A guide to how Mutual Funds work in Nigeria]
1. Bonds: When you buy a bond, you get interest payments after a set period of time. The payment will depend on the interest rate agreed upon by the issuer of the bond. At the end of the duration, the bond issuer repays the face value of the bond.
Bonds are considered more stable investments than stocks. They provide a steady flow of income, but the long-term return will be less when compared to stocks. However, it’s possible that sometimes bonds can outperform the rate of return of a particular stock.
Common risks for bond investors are:
- Inflation risk: The return you earn on your investment might not consider inflation. For instance, if you hold a bond that’s paying an interest rate of 3%, and inflation reaches 4%, your return will be negative (-1) when adjusted for inflation. Although you will get your principal back, it will be worth less than it does today.The longer you hold a bond, the higher the inflation risk.
- Credit risk: You stand the chance of losing your money if you purchase bonds from a company or Government that is financially unstable. This is known as credit risk or default risk. It’s possible that the issuer won’t pay back the face value of the bond when it matures or simply can’t make the interest payments.
- Interest rate risk: When interest rates fall, bond prices rise, and vice versa. This poses a risk if you need to sell a bond before its maturity date and the rates are up. You may end up selling for less than the amount you paid for the bond.
- Market risk: The entire bond market may decline. If that happens, the price of your investment will fall regardless of the quality of bonds you hold. If you decide to sell, you’ll earn less than the cost of purchase.
2. You savings account: You can deem yourself an investor even if you have just a savings account, but no other investment. This is because with your savings account, you are basically lending your money to the bank, which the latter gives out as loans.
Although the returns are extremely low, risks almost do not exist as long as your money is in a trusted bank.
Ownership investments: After lending investments come ownership investments. They are basically what come to mind for most people when they think of the word “investment”. They are the most profitable and volatile investment class. They include stocks, real estate, businesses, collectibles and precious objects.
1. Business: You make an investment when you put money into starting a business or running an existing one. Being an entrepreneur is one of the hardest types of investment as it requires more than just money. It can yield extremely large returns, as you could make a fortune by creating a product or service that is in high demand.
However, there are common risks for business investors as you can see below-
- Company risk: This type of risk occurs when you make bad business decisions, produce goods or services that do not meet consumer demand, or struggle to maintain positive cash flows.
- Credit risk: Credit risk is when you are unable to pay back investors or pay out investment contracts.
- Political risk: This type of risk occurs when international or domestic regions make changes to the business environment. Common political risks include high taxation rates, increased government regulation, war, terrorist attacks, or military coups. These create significant disruptions in the market.
2. Stocks: A stock is a certificate that says you own a portion of a company. When you purchase one, you are basically buying a piece of the company’s assets and earnings, as well as the right to perform certain action (as in a futures contract). Companies sell shares of stock to the public with the purpose of raising cash. Investors can then buy and sell the shares amongst themselves.
Your profit depends on how the market values the assets you own the rights to. If the company is doing well, other investors are going to want shares. The increased demand drives up the price. If you sell at such a time, you can earn great returns – this is known as appreciation or capital gain. Some stocks also pay dividends. These are regular distributions of a company’s earnings to its investors.
Shares offer some degree of protection against inflation, unlike bonds.
Stocks earn high returns but are often riskier than other types of investments. You can lose your money if the company loses value or goes out of business.
Some of the major types of risk for stocks investors include market value risks, economic risks, and inflation risks.
3. Real estate: These include land, houses, and other structures that you buy to rent out or renovate and resell for profit. It has a high profit potential and can provide steady cash flow in perpetuity.
Building a private residence cannot necessarily be considered as an investment because although it may appreciate over time, it is not acquired with the expectation of making profit.
Common risks in real estate investment are-
- Depreciation risks: Real estate properties are expected to increase in value over time. However, it’s also possible that a property can drop in value in the future and you’ll end up losing money.
- Location risks: Location is everything in real estate. If the area faces trouble in the future – perhaps it doesn’t develop as fast as you expect, or there’s a crises, and so on – you may end up losing money.
- Liquidity risks: Liquidity is the ability to access the money you put into an investment. Real estate properties may not be easily converted to cash. Selling is neither a quick nor easy process. And you may lose money if you sell under pressure.
Other risks include foreclosure, negative cash flow, structural issues, vacancy issues, and bad tenants.
4. Collectibles and precious items:
Gold, jewelry, art works and artifacts, and so on are some examples of ownership investments. These items hedge against inflation and are highly liquid.
However, there may be risks of physical depreciation or damage.
Cash equivalents: These investments protect your capital and allow you access to your money. They also deliver a more stable rate of return. They are, however, not designed for long term investment goals such as retirement. They include certificates of deposit (CDs) and money market accounts.
1. Money market account: These are savings accounts that may come with a higher interest rate than basic savings accounts. They however require higher minimum deposits and balances.
2. Certificate of deposit: A CD is a savings certificate with a fixed maturity date and interest rate. It is a promissory note issued by a bank (commercial banks). It restricts access to funds until the maturity. You may pay a fee if you withdraw before the agreed time.
Non-investments: Now that we have seen some of the ways you can invest your money, it is necessary that we also learn what does not count as an investment.
Consumer purchases are not investments. These include cars, mobile phones, beds, TVs, and so on. Anything that depreciates over time with use and time is not an investment – although they add to your net worth. You won’t expect anyone to pay more than the initial purchase cost, unless maybe you are a celebrity.
As a final note, it’s important to remember that spending on personal development is a highly valid investment. Improving your skills increases your potential for higher earnings.
Flour Mills moves to diversify funding sources with N29.8 billion bond listing
Flour Mills Nigeria Plc lists N29.8 billion bonds to diversify funding sources from the Nigerian capital market.
Flour Mills Nigeria Plc’s fresh N29.8 bond listing will help the nation’s leading food business company to explore diversified funding sources from the Nigerian capital market, with the hope of enhancing growth and the development of the company.
This statement was made by the Group Managing Director of FMN, Mr. Omoboyede Olusanya, at the listing of the Tranche A and Tranche B bonds valued at N29.8 billion on the Nigerian Stock Exchange (NSE).
The food and the agro-allied company which has remained Nigeria’s largest and oldest integrated agro-allied business with a broad profile and robust Pan-Africa distribution issued these bonds under its N70 billion Bond Issuance Programme.
Olusanya said that the company would continue to explore funding opportunities inherent in the capital market to ensure business growth and continuity.
While speaking about the Credit Rating of the Programme, he disclosed that FMN’s credit rating, as well as the operational financing of the Group, have improved considerably.
According to him, the bonds floated by Flour Mill will help to strengthen the company’s capital base and provide the needed working capital required by the Company. He added that Flour Mills Group will continue to deleverage and replace short term financing with longer-tenured and lower price funding to optimize capital structure and reduce financing cost.
He noted that Flour Mills will continue to explore opportunities to raise fundings via the capital market as this enables the company to diversify its funding sources and continue to play a role in the capital market as a significant player in it.
What they are saying
The Group Managing Director of FMN, Mr. Omoboyede Olusanya, at the virtual event, said;
- “We are delighted with the response from the market, we are happy to be listed.
- “We are introducing an N29.9 billion listing under an N70 billion bond issuance cover; we will continue to raise funding to diversify our funding sources.
- “The company remains passionate about feeding the nation to improve the quality of living for Nigerians through increased production and investments in backward integration.”
What you should know
- With the successful issuance of the new N29.8bn Tranche A and Bonds, FMN has utilized its bond issuance program registered in 2018.
- It is important to note that the Senior Unsecured bond listing includes an N4.89bn under Series 4 Tranche A of the bond issuance programme, at a 5.5% rate for 5 years, due by 2025, and a 25bn under Series 4 Tranche B of the same program at a 6.25% rate for a tenure of 7 years, due by 2027.
- The bond proceeds will be used to refinance existing debt obligations. It will also help the company take collaborative actions to diversify the company’s financing options beyond expensive short term debt.
January 2021 FGN Bond records oversubscription of N88.3 billion
FGN bond offer has received a total bid of N238.28 billion across all tenors.
The January 2021 FGN bond offer has received a total bid of N238.28 billion across all tenors, indicating it was oversubscribed by approximately N88.3 billion.
This fact was implicitly revealed through a disclosure by the Debt Management Office (DMO), seen by Nairametrics.
Nairametrics had earlier reported the offering of N150 billion worth of FGN bonds by the Debt Management Office for January 2021. In line with the notice, the auction occurred on the 20th of January, 2021 (yesterday).
The following are the key highlights of the 2021 FGN bond auction;
- A total of N91.84 billion was submitted for the 10-Year tenor worth N50 billion, implying that it was oversubscribed by N41.84 billion.
- The 15-Year tenor recorded a total subscription of N106.37 billion, implying an oversubscription of N56.37
- On the other hand, the 25-Year tenor was undersubscribed by N9.93 billion, after it recorded a total subscription of N40.07 billion.
What you should know
- Recall that the December 2020 FGN bond offer was oversubscribed by more than N70 billion, as reported by Nairametrics.
- Nairametrics learnt that the oversubscription is sequel to higher rates across all tenors for January 2021, at 7.98%, 8.74% and 8.95% for the 10-Year, 15-Year and 25-Year period respectively, compared to the rates of 6.945% and 7.00% for the 10-Year and 15-Year tenors at the last auction in December 2020.
Collapse in domestic bills and bonds yields forcing local funds into stocks
A collapse in yields on domestic bills (3 months at 0.35%) and bonds (five-year at 3.5%) is forcing local funds into stocks.
EFG Hermes has stated that a collapse in domestic bills yield (3 months at 0.35%) and bonds yield (five-year at 3.5%) is forcing local funds into stocks.
This is according to a recent report by the company tagged: 2021 The Year Ahead — Is the Recovery in the Price?
The report notes that current fixed income yields, of which bills and bonds are a part, seem unsustainable – citing that real 12 month yields are -13.8%. Hence, the report suggests that the country is likely to remain a cautious market for foreign investors in 2021.
Despite the awareness, the company is of the opinion that fixed income yields in Nigeria could stay higher than 2020 lows for the next few months, which may lead to heavy bond issues in early 2021, as precedent suggests.
- The company believes that the macro context is weak and policy-making is unpredictable in the country – pointing that although the country is facing a slow-burning BoP and fiscal crisis, it appears the authorities are making little efforts towards the difficult decisions necessary to put the economy and market on a sustainable footing.
- This may, according to the company, impact earnings growth negatively in 2021 and 2022.
Accordingly, the report contends that this is one of the reasons why foreign investors avoid investing in the country’s instruments – noting that foreign investors seem to be happy selling to the local institutional bidders so that current data on holdings and flows depicts there is not much foreign money left in the market – as illustrated by foreign and domestic portfolio investment.
What EFG Hermes is saying
- “While foreign portfolio investors are seeing some relief on the backlog, until we see serious policy changes, we do not think foreign investors will become net buyers of Nigerian stocks. There is no indication that such changes are in the pipeline.
- “We, therefore, expect a rising share of future net contributions to go to stocks, as well as cash coming from bond and bill maturities. However, we note that PFAs remain reluctant buyers, and the list of stocks in which they are happy investors is short.”