Investment Opportunities to help you build a financial fortress

As with physical fitness, building financial strength requires a lot of persistent and focused effort. In both cases, there must be a definite decision to get into shape and an understanding that the desired result will take some investment of time and other resources.

Investing in financial instruments is one way to build financial muscle. Because each financial instrument has its perculiar features, benefits and limitations, an understanding of the characteristics of the investment options will help you choose wisely and, hopefully, build a shock-proof portfolio. This article is designed to give you that insight and help you achieve your goal of building a stable financial future.

Two broad categories of financial instrument are addressed in this article: money and capital market instruments.

1. Money Market investment instruments.
The money market is the short-term end of the financial market where short-tenored financial instruments are traded. Instruments in the money market are usually of maturities of one year and less and are designed to enable parties meet temporary funding objectives - offload a surplus to earn some returns or borrow to bridge a shortfall. Investment instruments in this market will therefore serve your need when the investment horison is short-term. Consider picking from the following options:

Treasury Bills
This is issued by the Central Bank of Nigeria on behalf of the Federal Government and represents an IOU of the Federal Government. The tenor is usually 91days, though short-tenored bills (with less than 91 days to maturity) can be bought through the secondary window (OMO). They are usually sold on discount basis i.e. the buyer pays the discounted price and at maturity receives the full (face) value.

Because the Treasury Bill represents an indebtedness of the Federal Government, it is considered risk-free. You will therefore expect a lower yield than from bank deposits of the same tenor. They are sold in multiples of N1000, with N as the minimum tranche. Treasury bills can be rediscounted i.e. if the purchaser is unable to hold it to maturity, it can be repurchased by the CBN at the prevailing rediscount rate. An individual investor can buy treasury bills, but purchase must be through a bank. At maturity, the proceeds will usually be processed through the bank but the investor can indeed personally present the bill for redemption.

If you are very concerned about the security of your investment and have a short investment horison, investing in Treasury Bills may be the right option for you.

Bank Savings deposit
Most people in our environment are familiar with a bank savings account, which is a non-chequing bank deposit. It earns interest (usually the lowest bank rate) which is calculated and credited to the account at monthend or fortnightly. Savings account holders can withdraw at will from their account, though some banks may place some restrictions as to the number of withdrawals in a month, beyond which the account will lose the right to interest payment for that month.

Usually, only cash transactions are processed through a savings account as no references are taken. Today, however, some banks operate hybrid savings accounts which permit the use of cheques. Holders can lodge cheques for clearing and can draw cheques on their account encashable only within their bank's branch network. More importantly, there are target savings accounts that can help you to accumulate specific savings targets by restricting your freedom to withdraw. So, when you are aiming to build a reserve fund through small savings, a savings account may be the option to use.

Bank Call Deposit
A bank call deposit is money you place with a bank with a right to call it in at your discretion. Usually, only a short notice will be required required by the bank: one day for a strict call; a week for a 7-day call. In most banks, call funds can be withdrawn on demand. A call deposit will earn less interest than a term deposit because, for the latter, the banks knows exactly for how long it is keeping the deposit.

When best to use a call deposit? A call deposit is best suited for a situation where there is a investible sum which, however, may soon be required for for some other important purpose. Using a call account allows you to earn reasonable interest on the fund without loosing the flexibility to draw the fund as soon as the need for it crystallises. If, for instance, you have a bulk sum earmarked for buying a property which your estate consultant is currently searching for, a good option will be to invest it in a call deposit. You secure the money, earn interest and at the same time retain the liberty to call in the fund the moment a property is available. You can equally improve the management of your current account by using a call account. Your banker can be instructed to transfer to your call account, any balance above a specified limit. The fund is returned to the current account the moment you have need to draw on it. That way, your current account balances get to earn interest, which, for some customers, can accumulate to a sizeable amount.

Bank Fixed Deposit
A fixed deposit has a specified tenor. Also called term or time deposit, it could be for 30, 90, 180 365 days or something in-between. The term deposit is a contract; the interest rate is not expected to change until maturity. The depositor is also not expected to access the funds, though in practice banks will apply some penalty and meet an repayment request.

If it is clear that the available amount will not be required for a specific period and a bank deposit is considered, the fixed deposit option would be appropriate. The interest rate is usually higher than for a savings account, call deposit or treasury bill.

Commercial Paper(CP)
This is a short-term negotiable, unsecured promissory note sold by a company. Such companies are usually 'triple A' companies which have a good name in the market.

CPs are sold at a discount and have maturities of less than one year. As this note stands on the credibility and repayment capacity of the issuer, the risk profile is higher than for a bank deposit and a Bankers' Acceptance. The interest rate is also higher, compensating for the higher risk outlook. A CP investment will only make sense if the company issuing it is in sound financial health. The attraction is the higher earnings profile.

Banker's Acceptance
This is a time draft issued by a company and accepted by a bank. This acceptance is a guarantee, by the bank, that repayment will be made at maturity. BAs are usually of 30 to 180 days' tenor and responsibility for repayment at maturity lies with the bank.

What this means is that a company (usually of repute) can issue a paper to raise short-term money from investors and, to boost the credibility of the instrument, gets a bank to 'accept' it before it is offered to potential investors. BAs are bought at a discount by investors who get paid the face value at maturity.

The yield on a BA will ordinarily be higher than that of an equivalent bank deposit.

2. Capital Market Instruments:
The capital market, in contrast, trades medium to long-term securities. By design, it is economic agents in search of medium to long-term funding that utilize the capital market. Ideally therefore, you will look to the capital market for investment outlets when you have funds to plough in for the long term. However, capital market instruments can be traded in the short term, meaning that you can still invest short. The following are some of the options to consider:

Government Bonds
Is a bond issued by the government - Federal or state. A bond is a long-term promissory note by which the issuing party contracts to pay the purchaser the face value of the instrument at a definite future date and to pay interest at a specified rate (the coupon rate) at regular intervals during its tenor. Government bonds are called gilt-edged and considered risk-free. Bonds are usually issued in multiples of N1000 but could be bought at a discount or premium i.e. below or above the face value of N1000.

Corporate Bond
This is a debt instrument of a corporation, an I.O.U. representing debt which the corporation is obliged to repay. Corporate bonds are similar to government bonds except for the issuing authority, which in this case is a company. Corporate bonds will therefore represent a more risky investment than government bond.

If a corporate bond is convertible, it means that it can be converted to common stock. The conversion terms will usually be specified in the prospectus.

Preference shares
This is an ownership (equity) stock though its features have earned it the tag 'hybrid'. Holders are entitled to a fixed rate of dividend, a priority right over the common stockholders' right to dividend. However, unlike debt, this is a claim on profit (not a charge before deternmining it) and may not be paid if there is no profit. Also if profits rise exceptionally, this does not benefit them as the dividend rate is fixed (except in the case of participatory preference shares).

Preference shares may be cumulative, in which case unpaid dividend will accumulate and be paid when there is a profit. Preference shares may also be made convertible to common stock.

Ordinary Shares
An ordinary share gives an equity stake in a company i.e. you become a part-owner of a company when you buy its shares. Also called common stock, this ownership gives the investor the right to partake in the distribution of profits and to vote at the shareholders' meetings where important resolutions are made to shape the company.

At issue, the share has a nominal (or par) value but could be sold at par, discount or premium. Becuase there is an active secondary market for resaling shares, prices continue to move in reponse to market dictates, with the effect that actual market price could rise far above the nominal value or fall below it. Companies sometimes pay dividends by issuing bonus (free) shares to members thereby increasing their holding.

Buying shares gives you ownership rights but also limits your liability in respect of the companies indebtedness to the amount invested. Your personal assets will therefore never be applied in offsetting the company's debts. If the company is liquidated, the shareholder's rights are residual i.e. other creditors must be settled before any residual balance is distributed to members.

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