Investment. Investment. Investment. Seems to be the buzzword of the era. Every single place you turn, there’s someone talking about investment. Everyone seems to be talking about it. From social media pages to random conversations with friends, the word ‘‘investment’’ seems to be the new bae.
As interesting as it sounds, a lack of understanding of the term and all it entails would make you the awkward friend that keeps quiet when the conversation takes that turn.
So really, WHAT DOES INVESTMENT MEAN in simple terms? If you were a ten-year-old, how would we explain the term investment to you?
We would say, investment is your parents holding onto the N1000 cash gifted to you by your uncle during Christmas and giving it back to you in form of books and a school bag for school (at least that’s what they say do with it…lol) or giving you N1500 in place of the N1000.
In real terms, investment is acquiring an asset with the aim of generating income beyond its initial value. In some cases, an investment is the creation of an asset with the intention of allowing money to grow.
‘‘We would say, investment is your parents holding onto the N1000 cash, gifted to you by your uncle during Christmas and giving it back to you in form of books and a school bag for school (at least that’s what they say do with it…lol) or giving you N1500 in place of the N1000.’’
Without a doubt, having an investment is quite vital for wealth creation and expansion. Think of it as having multiple streams of income as well as a safety net for emergencies. Investing your income has proven to be better than keeping it in a savings account or a random piggybank which yields no return
Now that we know what an investment is, the next question is how and what do you invest in? With the evolution of time, investments have taken a new turn. There are various types of investments.
Types of Investments
- Cash and Commodities
- Bonds and Securities
- Mutual Funds
Cash and Commodities
These are usually cash incentives like lending out money with an interest attached on repayment or buying commodities that appreciate in value over time like gold, a piece of land, or digital currencies like Bitcoin, Dogecoin and many others.
Commodities like Gold are usually low-risk investments but oftentimes yield low returns as they are determined by external factors like scarcity and governmental policies. Digital currencies on the other hand have high returns as they are unregulated but are quite a high risk as they fluctuate and can sometimes be affected by governmental policies and a lack of widespread acceptance.
Bonds and Stocks
Bonds are fixed-income assets used to represent a loan borrowed by corporate entities to finance a project. Think of it this way, your friend gives you his favourite video game in exchange for a loan of your lunch money. You and your friend agree to a time for repayment of the loan with interest rates stated. When your friend pays back the loan with the interest, he gets the game back.
However, in recent times interest rates of bonds have become variable. So, you could have initially agreed at an interest rate of 2% but if the price of the game goes up in the market, you could increase your interest rate while still in possession of the game.
In real terms, bonds are units of corporate debt that are issued by corporate entities as tradable assets. Basically, it makes an individual become an investor cum lender to a multinational or even the government of a nation.
Stocks are equity shares. Basically, when you invest in the stocks of the company, you own a part of the company. I remember when I got my first job as a teenager and contributed to certain needs in the house. Like the TV Subscription which I paid for and thought I was now allowed to change the TV to whatever station I wanted because I owned it for that month…err….not exactly.
Stocks are similar to that. However, with stocks, you own part of the future profits generated by the company. Stocks Investment seems like a better option than bonds but not the safest because the amount of money you make is determined by how much revenue and value the company churns out aka the success or failure of the company.
Mutual Funds
These are the mother terms of stocks and bonds. They are multiple investment plans that are managed by a money manager. In this case, your funds are distributed between bonds and stocks and managed by a third party. Think of it as putting someone else in charge of a business financed by you. The person helps to bring a great return on it.
Mutual funds are low-risk investment options and quite safer because your funds are spread over several investment opportunities.
Investment, a choice or a must?
Honestly, this question can only be answered by you. However, as financial advisors and custodians of the funds of numerous individuals, investment is a must for everyone. We’ve spent the last 5 years watching people from various societal strata create and expand their wealth just from small investment opportunities. In uncertain seasons such as these, it’s important to create several streams of income to shelter you from rainy days.
P.S. This article was initially written as a pitch to a financial brand but that didn’t work out. So, I decided to publish it here.
