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Investment Fundamentals! A thread!!!
Most people misconstrue savings and investment. Savings is just setting aside money you won’t spend now for emergencies or future expenditures. Investment is actually buying assets or securities for which you expect a return on these securities.
These securities may include: Equity/Stocks, mutual funds or unit trust, bonds, treasury bills, commercial papers, fixed deposits, real estate and the likes. I’d take time to explain some of these. Especially the common ones.
Investment is about taking risk. You may have heard, the higher the risk, the higher the return, which is actually false. The right thing is, the higher the risk, the higher the EXPECTED returns. Thus, with investments you may actually lose your money and that’s why...
..you’re compensated for with the returns you make on your investments.
Thus you need to be extra careful on how you invest and where you invest. Now, let’s move to why you must invest.
Thus you need to be extra careful on how you invest and where you invest. Now, let’s move to why you must invest.
There's a popular Chinese proverb that says: “The best time to plant a tree was 20 years ago. The second best time is now.” Investing your money will allow it to grow. This return allows your money to compound, earning money on the money already earned & creating wealth over time
Let’s go back to the various securities I mentioned explain them.the very common one: TREASURY BILLS.
These are discounted instruments that are issued by a govt. They are usually termed as risk free basically because the chances of a govt default is very low thus they usually...
These are discounted instruments that are issued by a govt. They are usually termed as risk free basically because the chances of a govt default is very low thus they usually...
offer very small rates as interest. They’re called discounted because you pay a lower consideration to get the face value on maturity. So for example, if you want to buy a GHS1000 worth of t-bills, what you will actually pay will be 940ghs and at the end of the period...
The govt will credit your account with the 1000ghs. So you pay less and get the face value of how much you hold on maturity.
You may read that Treasury bills rate is say 14% pa. It doesn’t mean when u buy a 3 or 6 month or treasury bill you automatically get 14%. The rate quoted is per annum so if you buy for 6 months effectively you’re getting say 7% as the 14% is for a year!
FIXED DEPOSITS or term deposits are quite straightforward. There is a given rate, a fixed period. Eg. you invest 1000ghs @ 14% for a year. So at the end of the period, you get 140ghs as interest. Thus you’re given 1,140 on maturity. Notice the difference between this and Tbills
For tbills, you pay less and get the 1000 face value on maturity but Fixed deposits you pay the 1000 as principal and get 1000 plus the interest 140 on maturity i.e 1140.
A mutual fund is a kind of investment that uses money from a pool of investors to invest in fixed deposits, equity, bills, bonds or other types of investment. A fund manager decides how to invest the money, and for this he is paid a fee, which comes from the money in the fund.
Equity also used interchangeably as stocks or shares is basically a unit ownership in a company. Thus anyone who purchases becomes a part owner of the company. Note equity prices fluctuate. E.g assume you buy 500 company X shares at price of2ghs.Your total investment is 1000ghs..
Tomorrow, the price of the equity X might drop to say 1ghs and ur total investment will be worth 500ghs or say jump to 5ghs and ur investment worth 2500ghs. Thus equity prices are said to be volatile as it depends on the market information and sentiments.
THE KEY THINGS YOU NEED TO KNOW BEFORE INVESTING.
1. Your investment objectives.
You need to ask yourself what is my investment need? is it for constant income? Is it for capital appreciation, is it for capital preservation? Answering these qst CORRECTLY is very important...
1. Your investment objectives.
You need to ask yourself what is my investment need? is it for constant income? Is it for capital appreciation, is it for capital preservation? Answering these qst CORRECTLY is very important...
As it will direct you on which type of investment you should do. For example, if you have money for school fees due in3 months, you don’t invest it in shares where there’s a possibility you might lose your whole investments. You are better off putting it in 3month govt tbill...
Which is almost risk free and you’re assured of getting your money back when it’s due. Also, if you have a long term perspective and you’re risk taking, you might want to try shares. To be honest shares arw very good buys for the youth. There is actually a true story on equity...
Beyoncé performed for Uber in 2015 and instead of accepting her $6m pay cheque, she requested to be paid in stocks, today it’s worth over $300m. Yep, you read that correctly! Power of investment https://www.google.com/amp/s/finance.yahoo.com/amphtml/news/beyonc-going-bank-uber-going-210002083.html
KNOW YOUR RISK APPETITE!
You will fall under one of these categories:
Risk Averse- cautious approach
Risk Neutral-balanced approach
Risk Tolerant- greater than normal
Risk Seeker- aggresive risk taker
Each category has its own advantages and also the type of investments to do
You will fall under one of these categories:
Risk Averse- cautious approach
Risk Neutral-balanced approach
Risk Tolerant- greater than normal
Risk Seeker- aggresive risk taker
Each category has its own advantages and also the type of investments to do
For example a risk averse person may just opt for a treasury bill, a neutral person might go for mutaul funds, a moderate person might go for a fixed deposit, a risk taker might go for stocks. Note that this is not cast in stone. But remember, the higher the risk, the...
higher the EXPECTED return. Thus other things being equal a higher risk taker will likely earn more interest than a risk averse person. Bottom line, just know your appetite and invest accordingly.
DIVERSIFICATION IS KEY!
I mentioned that risk is present in every form of investment, thus, diversification is very important if you want to reduce your overall risk, it simply means “not putting all your eggs in our basket” in this case not one investment security.
I mentioned that risk is present in every form of investment, thus, diversification is very important if you want to reduce your overall risk, it simply means “not putting all your eggs in our basket” in this case not one investment security.
Thus, if you have say 50k ghs or 100ghs, you can spread your funds in Fixed deposits, equities, govt bonds, thus you enjoy the upside of all the asset classes while cushioning yourself if one of the securities is not doing well. Remember to diversify
DUE DILIGENCE
It’s also important to know where you’re putting your money! Please please pleeeeeaasse, DON’T ALWAYS CHASE ABNORMAL RETURNS. DO your due diligence on the organization you’re giving your money to! Ask yourself these questions...
It’s also important to know where you’re putting your money! Please please pleeeeeaasse, DON’T ALWAYS CHASE ABNORMAL RETURNS. DO your due diligence on the organization you’re giving your money to! Ask yourself these questions...
What is the track record of the organization? How long have they being in operations, who are the directors? What is the corporate governance situation like! Check online, check their website. Are they licensed? By who? It might surprise you what you will find!
It’s not too late, to start investing. You can begin today! Remember the Chinese proverb? If you have any other questions or inquiries you may DM.
Thanks for reading this!
Desmond Bredu, ACCA.
Thanks for reading this!
Desmond Bredu, ACCA.
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