There is a growing awareness and interest among today’s youth in Nigeria towards investing. More & more people now see investing as a way to grow their wealth and are supplementing it with their savings. Rather than just relying on saving money alone in traditional ways like bank or cash, Nigerians are now also investing in financial markets, commodities and real estate and so on.
This can be seen with growth in local capital market retail participants and online investing apps. Many new online investing apps and brokers have sprung up in past few years to cater to investing demand and hence making investing easier and more accessible.
There are several ways one can invest money, but the investing in capital markets is one of the most popular ways.
The capital markets connect investors who are looking to invest the money & businesses or entities who are looking to raise capital for their business or operations. Hence the name capital market. If done with proper research, it can offer an opportunity to investors to use their surplus capital and grow it, though there is also a significant risk involved in this – which investors need to be aware of.
Example of capital market is a stock exchange where one can trade shares of companies.
Nigerian Stock Exchange (NSE) is one of the largest capital markets in the African continent with market cap of approx. $74 billion USD in Q2 2020. Capital market in Nigeria and its participants are overseen by the Securities and Exchange Commission of Nigeria (SEC), a regulatory body which ensures that there are no fraudulent practices in the market and the money of investors is protected.
We look at the most common ways by which Nigerians can invest in the capital markets.
1. Equity Market and Indices
The equity market consists of shares issued by companies. Companies raise money for their businesses by issuing shares to the public. The public can invest in these shares through the stock exchange by using a licensed broker.
The price of shares go up or down depending on the supply & demand in the market for those shares, which largely depends on factors affecting the underlying company’s financials or sector’s performance among other factors.
Here, Retail Investors get an opportunity to invest in the leading public companies or sectors which have a potential for growth and in turn get return on their money – if the price of shares increases from the price at which they bought them.
There are two primary ways of participating the equity market. People can invest their money for the long term or they can trade shares on a daily or weekly basis. Investors need a CSCS (Central Securities Clearing System) account to be able to trade or invest in shares.
The first step to start investing in the equity market is to open an account with a registered broker. You should also educate yourself on how the Nigerian stock market works and what drives stock prices up.
Knowing how to mitigate your risk and protect your capital is essential before investing.
2. Unit Trusts
Unit Trusts, also known as mutual funds, are another popular way for investors to participate in the equity markets. A mutual fund collects money from a large number of investors and then invests the money on their behalf.
Mutual funds managers must be licensed by the SEC to ensure transparent business practices and investor protection.
A mutual fund is managed by expert investors and traders called fund managers. They use sophisticated investing and trading strategies based on their experience to provide returns to their investors.
Mutual funds are usually able to deliver good returns to their investors, however there is still significant risk involved depending on the performance of the underlying companies & sectors in which they are investing and fund manager’s ability and experience. Good mutual funds invest in diversified companies or sectors to reduce risks.
Investors can invest in mutual funds through instruments called units. The units of several mutual funds are listed on the Nigerian Stock Exchange. You can publicly trade these units just like the shares of a company.
3. Debt Instruments
There are several kinds of debt instruments that you can use to grow your money. Debt instruments allow companies and Governments to raise money from the public. Some of the most popular types of debt instruments are bonds and debentures.
Bonds are of two types: Government bonds and private bonds. As the names suggest, Government bonds are issued by the government while private bonds are issued by companies.
Government bonds are usually seen as one of the safest ways for you to invest your money. This is because it is highly unlikely that the Government will default on its commitment to repay the bonds. Example of Government bond is FGN Savings Bond.
Through debt instruments, you earn money through interest that accrues. You will also be repaid the principal amount that you have invested once the debt instrument matures. NSE lists about 138 bonds.
4. Exchange Traded Funds (ETFs)
Exchange traded funds or ETFs are similar to mutual funds. They allow you to make money through the performance of the index or collection of assets that they track.
Every ETF tracks a specific type of asset or index. For example, some ETFs only track the performance of stocks in the financial sector. If companies in the financial sector do well, then the value of this ETF also rises, and investors make money.
Exchange traded funds have units which are listed on the stock exchange. The units can be traded similar to shares through the exchange. Some of the different types of assets that are tracked by ETFs include local fixed income assets, local equities, international markets, commodities, currency, and multi-assets.
While investing in an exchange traded fund, investors should be aware of the underlying assets that the ETF tracks and understand the risks involved.
5. Real Estate Investment Trusts (REITs)
Real estate investment trusts or REITs raise money from the public and invest it in real estate. There are several types of REITs depending on the kind of real estate that they invest in. For example, certain REITs invest exclusively in shopping malls while others may only invest in premium residential properties.
Along with providing the opportunity for capital appreciation, REITs also pay dividends which can form a regular source of income for investors.
There are three main types of REITs that are traded in Nigeria on NSE. These are Equity REITs, Mortgage REITs, and Hybrid REITs. Investors can buy or sell units of an REIT just like shares through the Nigerian Stock Exchange.
REITs allow investors to make liquid investments in real estate which are otherwise illiquid assets. You can easily sell the units you own in an REIT whereas it can be difficult and time-consuming to sell property.
6. Derivatives
If you’re looking to make high-risk or speculative investments, then derivative financial instruments are another option.
Derivative instruments derive their value from the performance of an underlying asset. For example, you can have a derivative of a commodity like oil. If oil prices go up, then you stand to make money.
Derivative instruments were originally invented as a method to hedge against risk from price fluctuations. However, nowadays they are offered to retail investors as a speculative investment option as well. You can use derivative instruments to make both bullish and bearish bets on the price of the underlying asset.
The two primary types of derivative instruments are futures and options. Before trading derivative instruments, you should do in-depth research on how they work and how to invest through them. The NSE is now offering a range of derivative instruments based on stocks, interest rates, currencies, and more.
7. CFDs
CFDs or contracts for difference are another way for investors to take advantage of price movements in stocks, indices, forex trading, cryptocurrencies, and other types of assets. CFDs are high-risk instruments that allow you to make money from very short-term price fluctuations. They are usually used to trade in forex and commodities.
CFDs are high-risk because they are offered with leverage which increases the amount of profit or loss that you can incur from a trade. They are only meant for speculation and carry high risk due to underlying asset exposure and leverage.
CFDs are currently not regulated in Nigeria and can be subjected to abuse. However, Investors can trade CFDs through foreign forex brokers in Nigeria that are approved for derivative instruments by top tier regulators like FCA or FSCA.
Understanding the Risks Involved in Capital Market Investments
Before you start investing or trading in the capital markets, it is essential to understand the risks that are involved. You might have come across disclaimers that investments in the capital markets are subject to market risk. This is mandated by the Government because the capital markets are inherently risky.
There is no guarantee that you will make money from your investments. There is a high possibility that you may end up making losses since the price movements in the capital markets are highly unpredictable.
You should always diversify your investments, educate yourself on the risks involved with each investment, and practice risk mitigation techniques.
Rather than making short-term trades, it may be better for you to make long term investments since you are more likely to make money through such investments. Only invest money that you can afford to lose and never jeopardize your financial security.
The best way for beginner investors to invest in the markets is through mutual funds since you get an experienced fund manager who will take care of your investments. Beginners should seek advice from licensed financial advisor to help you make a financial plan and also to help you understand the risks of investments.
