What The Normal Person Does Not Understand About Investing (2)

investing, stock market, forex

How to Understand An Investment

Let’s take a look at the 3 investment channels and understand what drives the gains or losses of these investments:

1. Private Businesses.

A. A Business Idea. Let’s say an amazing friend of yours bring an idea to you for you to invest. Do you allow sentiments or emotions to guide you? Or you allow logic? Let’s say you allow logic. How do you prove if it’s worth it or not? Will you take a look at the business plan or check to see the office or online sketch? There’s truly no easy answer. What I can offer you is 60 minutes of my time to help you decide. If you’re interested, you can schedule a session here.

B. A Building. It’s important to note here that if you buy a building or build a house, it’s not necessarily an asset. (You should know that basically an asset is what brings in money while a liability is what takes money from you. It can be an investment but not an asset.) Here are some questions you should ask and get answers: How do you know if a building has a good rental value? Here are some factors to consider: location, utilities, neighbourhood etc.

C. Independent Forex Traders. I’m classifying this group here because more and more traders are seeing the opportunities in this field and are looking for investments from individuals. How do you know the right forex trader to work with? Before you sign an agreement with any trader, you need to see their books. How do they organize their process? What’s their cash flow? How long have they been trading? Where are the independent testimonies? How can you learn while they are trading your money? Don’t get carried away with the promise of lucrative returns within a short period and be quick to jump the process. It’s your money. Put a value on it by getting answers to your questions.

2. Capital Market. The capital market, also known as the stock market is a publicly traded and regulated market where companies sell their shares to the general public. The dividends and rise in share value are the key benefits of this market. The products and services of the listed companies are the bedrock of the value of the company. It’s important to consider the services of a stockbroker before playing in this field. The stockbroker is equipped with the required information from reports, research and analysis to guide an investor.

In Nigeria, the Nigerian Stock Exchange (NSE) manages the local capital stock market and it’s regulated by the Securities and Exchange Commission (SEC).

3. Money Market. The money market includes bonds, treasury bills and diverse kinds of funds provided by financial institutions and regulated by the Securities and Exchange Commission. The value of the funds is determined by the profits and losses of the funds. Most of these funds are invested in the capital market, corporate bonds, economic bonds, treasury bills and similar investments.

These funds are made available to the public by capital holding companies like FBN Holdings and Stanbic IBTC Asset Management.

What The Normal Person Does Not Understand About Investing (1)

investing, forex

Most people have heard that to be rich (legitimately), you have to invest. More often than not, the questions the average person will ask are: what do I invest in? How do I invest? How much should I invest? When do I invest? And lots more…

The purpose of this article is to break down the basic principles of investing in the most practical way for a fellow Nigerian that will enable anyone to take action.

Knowledge is key. Even if you don’t have the money at hand to invest today, you can take note of this information for when it will be useful.

So let’s dive in. First, some definition: What’s investing? Without a dictionary, almost anyone will agree with this conventional wisdom that “investing is putting money in a venture with the expectations of returns (or gains) for a particular period.”

If you agree with this definition, it means to invest will involve your money, a venture (business in any form) and time.

Now to answer some questions:

How much should I invest? The short answer here is to invest a percentage of your income consistently. No matter the size of your income, you can start to put a little away to invest. Anything from 10-30% is a good number to start with.

When should I invest? The quick answer here is every time. If you’re a salary earner, once you get your salary alert. If you’re a trader, everyday you make a profit. If you’re a business person, at the end of every month when you have tidied your books for the month.

Even though this article is about investing, it’s good to note that budgeting is a key habit towards sustainable investing. Budgeting will help to put your income, expenses, savings and investments in good order. It will help your planning. And planning is what prevents failure.

What should I invest in? This is the key part. Different financial advisors will counsel you in different ways. They will point you towards different directions. Friends and families will pull you to different paths all in the name of massive gains and with less thought toward security and stability.

In the end, your eventual financial success is your absolute responsibility. You need to know your options and make your decision on every investment. No one will make it for you. A quick note, if you follow the crowd too much, you won’t be in charge of your own decisions and the results, either success or failure.

There are different things to invest in, commonly called instruments of investments. I will focus on the markets that you can buy these instruments and then break it down further: private business, capital market and money market.

Investing in a Private Business: This is when you put money into a business that you own or owned by a friend for a return after a particular period. This can happen in diverse forms. You can invest in a farm and get returns when the farm’s products are sold. You can invest in a building and rent it out for a fee. You can invest in a business and get paid monthly depending on how the business generate revenue. You can invest in an idea until the idea becomes a viable business and so on. The risk here is high and your capital is often not secured.

Investing in the capital market. This is when you buy a share of a publicly-traded company on the stock exchange. In this market, you make money by getting dividends as defined by the company or when you sell your share at a price higher than when you bought the stock. The risk here is medium and your capital is fairly secure.

Investing in the money market. This is when you put your money into the banking system in the form of fixed deposits, treasury bills, and bonds. The risk is low and your capital is secure to a great extent.

No investment guarantees your capital. Every investment carries risk and this is why it’s important to ask as many questions as possible and get the answers before parting with your money on any investment medium, no matter the promised returns.

I’m sure many people will want to know about other investments like forex trading and the likes. I won’t Forex trading as an investment. As the name suggests, it’s Foreign Exchange trading. It relies on the different currencies of the world. Just as any petty trader will go to the open market to sell their wares, forex traders are on their computer systems buying and selling currencies per second. And with any other trading, you win some, you lose some.

A key path to understanding financial investments is asking questions. Do not hesitate to ask questions that will help you understand the effect of your decisions.

Disclaimer: This article does not constitute financial advice. Do your research and consult your financial advisor before you make any investment decision.