The purpose of this article is to introduce you to different investment opportunities in the Nigerian financial market so that your money can work for you, and you earn passive income from your idle cash thus setting yourself on the path to financial freedom.
At the end of this course, you will be able to understand and know how to invest in the following assets:
- Financial assets:
– Fixed income assets
– stock or equity
- Contractual savings:
– Pension funds
- Investment companies:
– Mutual funds
Some individuals are earning more than they currently “need” to spend (this creates an opportunity to save/invest part of your income) while some people “need” to spend more than they currently earn such as retirees or a person who lost his/her job (this is when you reap the rewards of your savings/investment)
So you can invest your extra cash during your high earning periods and during your low earning periods you will be able to meet your financial needs with the interests you get on your investments or by selling the assets.
A person can choose to either spend all the income he/she makes today or invest part of it for the future and propel himself/herself towards financial freedom.
Before we start, first let us understand the difference between savings and investment.
Savings is keeping certain amount of money from your income for future purposes ( purchases or emergencies). This money is usually kept at home or in savings account and can easily be assessed. Usually savings earns you little or no income at all.
Investment is the purchase of asset(s) with the “hope” of earning money from it example property, stocks, bonds, etc. Investment can be a bitter or sweet experience.
As mentioned earlier, the focus of this article is investment.
Assets can be classified into real assets and financial assets.
Real assets are assets that generate the entire output produced and consumed by the society. It determines the productive capacity & net income of the economy e.g lands, buildings, natural resources, machines, precious metals, knowledge etc
Financial assets are assets that give the owner legal claims to a future cash flow from real assets. It’s like a contract where the issuer agrees to make future cash payments to the investor (the legal owner of the asset)
Financial assets contribute to the wealth of the individuals or firms holding them because financial assets are claims to the income generated by companies or income generated by the government that issued the assets.
The focus of this article is on financial assets.
There are 2 main types of financial assets
- Fixed income assets (debt security/instrument)
- Common stock/equity
Fixed income assets –
▪︎This is an amount of money borrowed by one party (issuer) from another party (investor)
▪︎It has fixed payments ( principal and interest)
▪︎ It has fixed maturity period
– short term maturity is 1year or less
– Long term maturity is more than 1 year.
▪︎The issuer can be
– government – e.g government bonds (long term maturity) or Treasury bills (short term maturity)
– Corporations (companies or businesses) – e.g corporate bonds (long term maturity) or commercial papers (short term maturity)
Stock or Equity
▪︎When you buy the Stocks of a company, it gives you ownership right in the firm (a shareholder)
▪︎If the company is successful, it will be paying dividends to shareholders
▪︎Dividend is not fixed and it is not compulsory. It depends on the success of the company.
Financial assets are traded in the financial markets
A financial market is where companies and governments raise finance by selling financial securities to investors. It is a meeting place for borrowers (corporations & governments) and lenders (investors). The prices of assets are determined by demand and supply.
In Nigeria the market is regulated by the Securities and Exchange Commission, to ensure that any deal is fair. Investors are free to choose/buy any asset based on their level of risk.
Main categories of Financial markets are
- Primary and secondary market
- Capital and money market.
Primary market is where new securities or assets are issued or sold for the first time e.g IPO, TB, Bonds,
Secondary market is where securities/assets that has been previously issued are traded.
Capital market is where long term securities ( with more than 1 year maturity) are traded such as equities, long term bonds
Money market is where low risk short term assets (more than 1 year maturity) are traded e.g Treasury bills, commercial papers.
Bid price & Ask price
Bid is an offer to buy. Bid price is a price which buyers are willing to pay for an asset.
Ask is an offer to sell. Ask price is a price which the sellers are willing to sell an asset.
Now that we have familiarized ourselves with some terms, the next article will focus on the main objective of this course, which is learning how to invest in the Nigerian Financial market.