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.
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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.
FMDQ admits Axxela funding of N11.5 billion bond on its platform
FMDQ explained that Axxela Funding 1 PLC is a special purpose vehicle incorporated by Axxela Limited.
The FMDQ Group, through its subsidiary, FMDQ Security Exchange Limited, has admitted the Axxela Funding 1 PLC N11.50 billion Series 1 Bond on its platform.
According to News Agency of Nigeria (NAN), this was disclosed by the FMDQ Group in a statement that was issued on Thursday, July 9, 2020, in Lagos.
The statement explained that FMDQ admitted the N11.5 billion Series 1 Bond, which is under the Axxela Funding N50 billion bond programme on its platform.
FMDQ explained that Axxela Funding 1 PLC is a special purpose vehicle (SPV) incorporated by Axxela Limited to raise funds through the issuance of debt securities in the domestic capital market.
According to the statement, “Axxela Limited, owned by Helios Investment Partners, is a natural gas shipping company on the West African Gas Pipeline, providing unique energy solutions with presence in Nigeria and gas export operations in neighbouring West African countries.
“The admittance of the Axxela bond is testament to the opportunities which the Nigeria Debt Market Capital (DCM) avails to corporates in diverse business areas and further, to the potential of the market to support stakeholders effectively even as they carry on their activities in the face of the pandemic.
“The Axxela bond, by its listing on FMDQ, shall be admitted onto the FMDQ Daily Quotations List; thus, promoting the much-needed transparency for investors and providing a credible basis for portfolio valuation daily.
“Also, through the global visibility which the FMDQ website and systems guarantee, the corporate profile of the issuer is raised even further ahead of tapping into other opportunities in the Nigerian capital market.”
The FMDQ in its statement revealed that the Nigerian Debt Capital Market plays an important role in the efficient mobilization and allocation of resources in the economy. Despite the impact of the current economic crisis, the market had continued to effectively support corporate firms looking to expand their business operations.
Therefore, the FMDQ, in its role as a market organizer of the Nigerian Debt Capital Market, amongst others, has continued to provide stakeholders in the Nigerian capital market with a credible and robust platform for capital access, risk management and transfer of value.
This means that Axxela Series 1 Funding will have the opportunity to global visibility through FMDQ Exchange’s website and systems.
The Series 1 bond would be included in FMDQ Daily Quotations List, in order to ensure and maintain information transparency.
Covid-19: Companies raise N222 billion in capital during lockdown
Corporate organizations successfully raised at least N222.6 billion from the 24th of March till date.
The COVID-19 pandemic is unarguably the greatest disruption of recent times. Not only has the world been faced with the existence of a real-life plague, but its impact has also been felt across industries, economies, markets, and more. Yet, corporate organizations successfully raised at least N222.6 billion from the 24th of March till date, covering the toughest periods of the economic impact of the pandemic itself as well as the pandemic-induced lockdown.
Across the world, businesses and companies alike have sought out ways to curb the menace that is the pandemic through the introduction of cost-cutting measures to withstand the storm. However, in the midst of this, an array of companies have also sought out ways to raise finance to ensure their sustainability while also leveraging the relatively cheap opportunity to raise capital.
Increase in Listing
Data from the Nigerian Stock Exchange (NSE) reveals corporate bodies and the government have raised capital and facilitated secondary market trading activities worth over N1.8 trillion. A number of securities have also been listed on FMDQ. Methods used cut across Rights Issues, private placements, bond listings, etc., and they have been supposedly geared towards supporting working capital needs of the organizations, facilitating business expansion and more.
Listings over the period include; LAPO Microfinance Bank’s bond worth N6.2 Billion, NewGold ETF valued at N7 Billion, UACN Property Development Plc’s N16 Billion Rights Issue, Dangote Cement Plc’s bond worth N100 Billion, FBNQuest Merchant Bank’s Series-1 N5Bn Bond, Flour Mills’ N30 Billion Series 13 & 14 Commercial Paper programme, Primero BRT Securitisation SPV Plc bond worth N16.1Bn Bond, and the Golden Guinea Breweries Plc’s private placement of N1.2 Billion. Also listed are MTN Nigeria Communications plc’s proposed series of N50 billion and Transcorp Hotel’s N10 billion Rights Issue.
In addition to this, several Government Bonds worth over N797 Billion have also been listed within the past few months. Other companies have also listed capital financial issues include Guinness Nigeria (N5 billion) and United Capital (N20 billion) through commercial papers, also offering low-interest rates to suit the overall trajectory of the economy.
The amounts raised
Of the various amounts listed over the same period, Flour Mills has raised N7 billion. FBNQuest Merchant Bank’s 5 billion issuance was 2.3 times oversubscribed but news reports are not clear as to how much was actually received; UACN Property Development raised N16 billion; Dangote Cement was 1.5 times oversubscribed, raising N155 billion; The Golden Guinea Breweries, Primero BRT Securitisation SPV, and NewGold ETF were all 100% subscribed at N1.2 billion, N16.1 billion, and N7 billion respectively. United Capital raised N5.3 billion in Commercial paper issuance and N10 billion in its Series 1 Bond issuance, and LAPO Microfinance is ongoing. This brings the total amount raised in the period to at least, N222.6 billion.
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The attraction with raising capital in a COVID-19 era
The pandemic has brought about the world’s worst statistics and Nigeria is no exception with rising inflation juxtaposed with lower-than-normal interest rates – and that appears to be the catch. A common phenomenon across these bond listings is that many have been oversubscribed despite COVID-19 headwinds. In other words, with very limited opportunities available across markets, investors have rushed at many of these bonds at their comparatively low coupon rates. Given that these investments are locked at fixed interest rates, companies now have the opportunity to piggyback growth strategies on affordable capital raising. With investors, on the other hand, grappling for opportunities to shield their funds from inflation, the situation appears to take the semblance of a win-win situation.
Why interest rates on treasury bills, bonds crashed
The yoyo between debt and equity is likely to ensue as uncertainty remains in the forex market.
The Nigerian debt market has been faced with a series of challenges, most of which were triggered by the worst pandemic recorded in human history. Its prospects in attracting foreign portfolio investors were dampened as macros on Nigeria’s economy revealed a downtrend in the market, and this trend has only worsened in the past months.
The fixed income market sustained its downward trajectory for the third consecutive month in June 2020 largely driven by excess liquidity as well as an overall scarcity of instruments in the market. Reports from several analysts indicate the demand for fixed income securities has increased considerably over the last 6 months driving down interest rates earned by investors.
Victor Silas an Investment analyst told Nairametrics about the OMO bills liquidity for the month of June. He said, “For June, fixed income rates were liquidity-driven following the ban of locals from OMO and limited investment outlets. OMO bills maturities are creating more liquidity for locals and it is finding its way to the bond market and Treasury bill.
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“The 2050 trading below 11% yield and the 364-day Treasury bill closing at 3.4%. It just tells you there are a lot of liquidity concerns for locals.”
Most foreign portfolio investors based abroad are staying out of naira debt dominated securities; this shows that Nigeria’s debt markets are now controlled by local investors.
Nigeria attracted just $67.9 million in Foreign Portfolio Investment (FPI) inflow for the month of April 2020, the lowest inflow recorded this year. A cursory look at the Central Bank data shows that FPI sharply reversed from $2.30 billion at the beginning of the year (January) to just $67.9 million inflow in April 2020. Nigeria like most emerging markets relies heavily on foreign portfolio investments to shore up its external reserves and manage its exchange rate position.
Portfolio inflow into money market instruments fell from N1.6 billion and N1.4 billion in January and February respectively to just N229 billion and N49 million in April and May respectively. On the flip side, those that still have their investment stuck in Nigeria, have stayed away from any other type of investment except money market instruments such as bonds and treasury bills. Most of the investors are waiting patiently for the central bank to fund their dollar purchase so they can exit.
Emmanuel Orji Emerging Market/ Fixed Income Trader, COMERCIO PARTNERS spoke to Nairametrics on the performance of fixed income securities in June. He said;
“Subsequently, the unexpected reduced sale at the June bond auction of NGN100 billion as against the NGN150 billion originally offered further strengthened the aggressive bullish run in the bond market.
“The bond auction closed relatively strong as a result, with a bid to cover ratio of 3.6x and rates declining by 120bps, 70bps, and 45bps to print at 8.00%, 11.00%, and 12.15% across the 3-year, 5-year, and 30-year maturities respectively. Note: BPS refers to basis points, a financial term for percentages. 100 basis point is equal to 1%.
“As a result, yields for the benchmark securities monitored declined across all maturities on a month-on-month basis, with yields of the sovereign bonds with 3-year, 5-year, 10-year and 20-year maturities declining by 332 bps, 138 bps, 96 bps, and 138 bps to close at 5.64%, 7.13%, 9.76%, and 10.05% respectively.
“Given the amount of idle PFA cash sitting in bank placement (c. NGN1.5 trillion) and the sudden weakness in demand for equities, we expect the buying interest to persist in the near term, which should drive yields lower in the bonds market.”
Nigerian fiscal stakeholders have resorted to borrowing domestically as opposed to seeking for funds abroad, another effect of the pandemic. This is expected to lead to an increase in the yields of FGN bonds in the short and mid-term horizon as the inward plan to seek funds locally intensifies.
Where this leaves equities
Concomitantly, the equities market benefitted from the apparent thirst for asset yielding investments in recent months. As yields for safer investment fell, investors shifted to the equities market taking advantage of the earning season often market by dividend payouts. Most stocks paid dividend yields in double digits following the stock market crash in March 2020.
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But by June the market sell-offs ensued with investors moving funds out to secure stakes in corporate debt securities. The yoyo between debt and equity is likely to ensue as uncertainty remains in the forex market and the country’s stimulus plans.
Some retail investors who spoke to Nairametrics insist they have abandoned the Nigerian Stock Market preferring to trade in cryptocurrencies or US stocks. The proliferation of intech supported investing apps has made cross border investing easier providing access to market far beyond the shores of Nigeria.