Basics of investing in Nigeria

346 0

What comes to mind when you hear the word investments? For a good number of Nigerians it is creating some sort of business, a warehouse distributing goods, buying some plots of land in developing areas etc. Many Nigerians are yet to accept investing in assets like Gold, stocks, ETFs, cryptocurrencies etc. According to the Sun, since the introduction of ETFs in Nigeria in 2011, acceptance and participation by Nigerians has been very low. 

Why are some Nigerians sceptical about taking advantage of these investment vehicles? Why do some Nigerians prefer traditional investments over other established investment vehicles? For some Nigerians, it is the bad PR that these “investments” have gotten. For example, those people who “invested” in Ponzi schemes like MMM and Racksterli have had bad first experiences with investing. It would take a lot of convincing to make them see the reality and profitability in investing in stocks or cryptocurrencies for example. While these are bad experiences, the onus is on those that fell prey to these schemes to pick themselves, learn more about investing and make better investment choices.

Understanding the various asset classes.

High risk assets:

Stocks: Investing in stocks means buying shares of ownership in a public company. Those shares are called stock. If a stock you own becomes more valuable, you could earn a profit if you decide to sell it to another investor. A very simplified example is buying 20 units of  stock of company ABC in January at N150 per share. In May, these shares have risen to N200 per share. If you decide to sell then, you have made profits of N50 per share which amounts to N1000 in total.

Mutual Funds: A mutual fund is an investment fund that pools money from many investors to purchase securities. Investing in mutual funds is less risky but the returns are not so juicy either. Mutual Funds like the Stanbic IBTC Dollar Fund promises 

Exchange-traded fund ETF: An exchange-traded fund (ETF) is a type of pooled investment security that operates much like a mutual fund. For example an ETF may consist of the top 20 pharmaceutical companies in Nigeria, a rise in the pharmaceutical sector would see investors who put in their money make profits.

Commodities: This is simply buying commodities like Gold, Silver, Sugar, Crude Oil in anticipation of higher prices. When the prices do increase, you can sell and make profits. Investing in commodities these days can be done from the comfort of your home and you don’t need baskets of groundnuts being delivered to your house. The assets are simply added to your portfolio and can be sold at any point.

Low risk assets

Treasury bills: Treasury Bills, also known as T-Bills, are government-backed, short-term securities issued by the CBN. They are issued when the government needs to borrow funds for a period of time. They have a maximum maturity of 364 days. T-Bills are sold at a discount from their face value. Although similar to a short-term bond, t-bills are different and offer low yields compared to high-risk investments.

Bonds: Bonds are lower-risk and lower-return investments than stocks, which makes them an essential component of a balanced investment portfolio, especially for older or more conservative investors.

That being said, how does one get started in investing in Nigeria?

  1. Do your own research (DYOR): A popular jargon in investing is DYOR. This is a way of telling prospective investors to do their own diligence. Before you start your foray into investing, you need to do a considerable amount of research by yourself. Understand the various asset classes, know what “ludicrous” returns sound like and learning how to identify pyramid schemes. For example, if an investment program promises you say 40% ROI per month and encourages you to invite as many family members, co-workers and friends as possible, then it is most likely a pyramid scheme. Robbing Peter to pay Paul.
  1. Determine your risk appetite: Are you a risk taker? What is the highest amount of money you have lost? How did you feel about losing that amount of money? Can you lock your funds in an investment for a whole year and get just a meagre 10%. These are questions you should ask yourself to determine your risk appetite. Some people are risk takers and can lose amounts of money that would give others sleepless nights and not bulge about it. For some, even a 3% reduction from their original investment can cause them heart palpitations. As a new investor, you need to understand yourself and know the amount of risk you are willing to take on.
  1. Choose the asset classes you want to invest in: Asset classes are ways in which various assets are classified or grouped. For example, we have stocks, commodities, cryptocurrencies, ETFs, treasury bills etc. The stock market for example is speculating on the short and medium term future of a company. If you predict that a company would do well in a certain time period, you may bet on them by buying their stock.
  1. Choosing the best broker or investment platform: Many investors have lost some or all of their principal by simply choosing the wrong brokers or platforms. Many a shady broker have closed down and vanished into thin air with investor funds. Before depositing your hard earned cash with these platforms it’s important to Do your own research, look out for genuine reviews from their existing customers. Look out for red flags and ditch shady options no matter how juicy their other offerings sound.

Leave a Reply

Your email address will not be published. Required fields are marked *

Discover more from District234

Subscribe now to keep reading and get access to the full archive.

Continue reading