Savings and Investment are the sure ways to build wealth and enjoy financial freedom. Investment involves postponing your consumption today in order to put your savings where they can grow to more in future. It is a necessary condition for creating wealth. Investment helps in realizing one’s dream such as buying a house, a vehicle, a farm, a factory, a business or even education. Investment puts your savings to work to earn returns. It is impossible to create wealth without investing, which gives you the key to secure the future. Investment is a time-honoured practice for increasing your wealth and can let you have a comfortable retirement.
While investing in other areas like the money market, real sector and structured schemes are crucial to financial stability, investing in the capital market is established as one of the most significant investment platforms across the world. The Capital Market is the market for trading in securities mainly stocks and bonds and is divided into two: The Primary market which deals with the sale and purchase of newly issued securities of a company or government also called new issues and the Secondary Market which covers Securities exchange (SE) and over the counter (OTC) market where existing securities of companies and government are traded through the services of stock brokers. While the proceeds realized from primary market goes to the issuing company or government, the proceeds from the secondary market goes to the selling investor.
A share, equity or stock is a unit of ownership in a company. When you buy a share in a company, you become one of the owners of the company to the extent of your shareholding. You participate in the affairs of the company through your voting rights at the General meetings.
When the company reports profits and decides to distribute the profits, you are paid a dividend income. Based on the performance of the company, the price of its shares may increase significantly thereby making appreciable allowance accrued to the investor. At this point, the investor may sell the shares at a price far higher than the purchased price to profit by way of the capital gains. However, it should be clarified that circumstances may arise for companies to make losses leading to decrease in their share price that will cause the shareholders to sustain losses on their investments.
A bond is a debt. When you buy a Treasury Bond issued by Government you are a lender and the Government is a borrower. Equally, when you buy a bond issued by a company, the company is a borrower and you are a lender. The bonds will promise to pay you an interest income periodically. Bond investment is different from that of stock investment. Bond investment is investing in the debt instrument that is issued by a company or government. The bond investor is actually lending money to the company while in return is promised to be paid the full principal amount plus a fixed periodic payout. The yield on the bond is calculated by putting together the final principal and total payouts received. The yield is the effective interest rate for the tenure of the bond.
Bonds can be an important part of your investment portfolio. Though generally credited with lower average returns potential than you would expect from stocks, bonds have their strong points, too. Investing dominantly in bonds can also prove a successful business.
In Nigeria, the capital market has little attraction to the general public despite the wide acceptance of this vehicle for wealth-creation. This is mainly due to lack of good understanding of the operations of the market and its potentials for wealth creation. Meanwhile, our capital market is adjudged to be more profitable than even the so-called developed destinations in terms of returns on investment for a discerning investor. No wonder, a major chunk of our securities are held in portfolio investments of foreign investors and institutions. However, it must be appreciated that many more Nigerians are embracing the capital market by the day following the current effort of the Nigerian Stock Exchange (NSE) to draw the attention of the populace to the opportunities that lie in the capital market. Buying and selling securities is a full business engagement for many. These are mainly the stock traders (the stockbrokers) and fund managers. For many more, investing in stocks and bonds may not be a full-time engagement, but it represents an important element of their strategy for financial security and retirement planning.
In general, building massive wealth from stock investing is not a new thing. Many big names in America and some of the wealthiest today, either built their wealth mainly from the stock market, or will be seen listed as shareholders in many quoted companies. Even when they’ve made money elsewhere, the stock market offers a depository to hold and further grow their wealth. Many of these people started small and gradually accumulated holdings that now count in billions. Examples are Warren Buffett, Per Lynch, Bill Gates, etc.
The significant thing about success paths is that most of what others have done to succeed, if understood and replicated creatively, can bring similar results as those earlier achieved. You can still build wealth in the capital market investing in shares of quoted companies, following the footsteps of the millions who have treaded that path. Nigerian Stock Exchange has had the exceptional track record, over several years now, of out-performing the major markets around the globe, in terms of average returns on investment.
The Nigerian capital market has continued to mature and has, interestingly, remained in the top bracket of global stock exchanges, in terms of return on investment to stock investors. To invest successfully, you need to understand the market and the key parameters that shape stock performance. You also need to learn the basics of investment in the capital market and the tools to leverage for top results and safety. The best time to start investing is NOW. Generally, the earlier you start in life, the longer the time you have to invest and to accumulate more benefit.
I would like to provide immediate steps for people who are considering investing in the stock market:
- You need a stock broker.Only licensed stockbrokers can buy or sell shares on the Nigerian Stock Exchange. If you must buy shares, you need an account with a broker. Just be careful to select a knowledgeable, honest broker and one that understands customer management. Your broker will also provide a lot of needed investment guidance.
- You need investment education.This is not to ask you to go back to school. But it means you must begin to take interest in news and information about the economy, stock market and individual companies, which, luckily, is readily available: newspapers, business magazines, TV channels, online, publications of companies and the exchange, word-of-mouth, etc. It will also profit you a great deal to know the basics about stockholding and market behaviour.
- Set your goals as to what you want to achieve.A long-term perspective will always be a wise approach, but act according to your objectives. If you need help, your broker is a good place to start.
- Decide and take action.No idea, no matter how brilliant, can get you anywhere, until you begin to take action. Mistakes may be made, but see them as tuition fees if money is lost. Over time, if you have learnt the ropes, you are likely to recover them several fold.