WHAT YOU NEED TO KNOW BEFORE MAKING YOUR FIRST INVESTMENT
Your first Investment might come with so much anxiety due to several uncertainties including the fear of not getting returns or worst losing your capital, this usually occurs when it seems you do not have enough informations on what you’re venturing into.
Having made the good decision to allow your money work for you, you need to have a basic understanding of what investing actually entails, particularly the jargons associated with it so as not to be intimidated with the said complexity of investment.
The last thing you would want is to have no clue on what goes on with your investment capital.
Whether as an active or passive investor,these are important terms you will definitely keep coming across in your investment journey and which you will need to familiarise yourself with includes:
• Returns: Returns or ROI(Returns on Investment) is simply the profit gained from an investment, which should be a positive value so far the market is in a good condition. For instance, a farmer who planted during the planting season would expect yields during the harvest but that is dependent on the weather and climatic conditions at that period of time.
• Risk: This is the possibility and amount of loss an investment can be subjected to, it could be partial or complete, depending on the volatility of the investment.
• Brokerage account: This is an investment account that allows you buy, sell and keep investment. It is used to keep or hold your financial assets with a broker or brokage firm, similar to keeping money and properties with the local banks. Whether with an online or offline brokerage firm, opening one is the first action in investing.
• Portfolio: this is a range of different investment instruments held by a person or an organization.
•Securities: these are financial assets or instruments that can be traded to raise money in private and public markets. They can be equities otherwise known as part ownership in a business, debt or hybrid.
• Shares: these are units of fractions of a company let out for ownership to raise capital or for similar purposes, they are expressed in percentage. The owners are referred to as shareholders.
• Dividend: this is an amount of money a company pays its shareholders from its income over a period of time which could be monthly, quarterly, half a year or yearly.
•Robo-advisor: this is a digital financial advisor which with the aid of your goals and risk appetite builds your portfolio and manage your investment to match the performance of the market. It is ideal for passive investors whose interest is not to beat the market.
Three things you have to ask yourself before you begin your investment journey includes:
1. How do I want to invest? : To answer this, you need to know how much of your time,interest and effort you are willing to commit into investment. This will help you decide whether you will be an active or passive investor.
Active investors make detailed research and analyze the market, invests through local brokers with the goal of beating the market while passive investors puts in their money in Investment vehicle while someone else does the work with the aim of matching the market performance.
2. How much do i want to invest? : As oppose the belief that you need to have a lot of money before you can venture into investment, you can actually make your first Investment with a little amount of money depending on the minimum requirement of the brokerage firm you will be investing with, as they differ from one another.
However when starting an investment as a beginner, to avoid the need to sell your investment as a bid to settle some bills, it is advisable that you try to set aside some amount of money as an emergency fund alongside your income just in case of a need arising.
3. What do i want to invest in? : though there are diverse options to choose from as well as different cons and prons involved, you get to choose whichever that would work for you as there's no one-size-fits-all when it comes to Investment.
To decide on this, you need to know why you're investing in the first place; although the reasons might all boil down to increasing and making money, the need could differ from person to person, perhaps towards starting a family, to finance bagging a degree, towards retirement etc. Whichever the case may be, understanding your needs will help you know what risk you can tolerate, what returns you should work towards, thereby deciding what investment plan to take on.
Before making a decision as to what you intend investing in, you need to have done an assurance guarantee research on the investment medium based on past trends and value of the business, regardless of what the present status might be.
Among several numbers of investment instruments you could choose from, the most common includes:
• Stocks: these are the most common and oldest in the financial market, and they are simply shares or equities of a business. They are securities that represent the ownership of a fraction of a business or corporation.
Owning shares of a business means owning the profit and loss of such business i.e if you buy an amount of a company's share, if the worth of the company increases by 50% at a certain time, the worth of your Stocks increases by 50% also.
As a result of this, they have a higher return rate as well as risk compared to other securities due to their volatility. In some cases, the risk involved could be a swing in the price perhaps due to unfavorable market conditions especially when the stocks are kept for short term and in certain cases, the risk involved is a complete loss which occurs when the business fails or the company folds up.
• Bonds: these are the next most common investment tool which involves lending money to an entity, that could be a business or government entity, the person selling the bonds is the debtor while the one buying it is the lender. The interest paid on the loan alongside the principal money is what makes up the returns in this.
Government issued bonds includes federal government bond, treasury bills, treasury notes, treasury bonds; since the government is never short of funds, they're the less risky ones and have lesser returns as compared to corporate bonds which has its interest rate falling between 5.52-6.14%.
• Crypto currency: this is digital money secured by block chain technology, it has emerged as an important investment tool in the financial world for about 5 years now.
Investing in this could take various forms ranging from investing in crypto funds and companies involved with it as well as buying crypto currency through crypto exchange platforms or through a broker. Presently, it's one of the investment with very high interests of 4% to about 18% at times but also the most risky due to its high volatility.
•Fixed deposit: one of the oldest and safest investment instruments provided by the local banks, similar procedure with bonds as they are also kept for a stipulated period of time but with little or no risk except that there could be a charge if money is withdrawn or requested for before the agreed time.
The average annual returns of 2.5-6.9% are as well higher than that of savings or current accounts which is about 1.5-2.0%.
•Mutual funds: these are collections of investment assets packaged as a single investment that allows investors pool their money in a broadly diversified investment managed by a financial manager.
The interest ranges from 3-4% on the money market mutual funds and 10-12% on the equity market mutual funds.
•ETFs: Exchange Transfer funds are very much similar to mutual funds but bought and sold on the stock market rather than a fund company. It allows investors buy many stocks or bonds at once.
•REITS: Real estate investment trusts are instruments which invests across diverse range of property sectors. While some own properties such as offices, shops, apartments, industrial areas etc and make rental income from leasing and selling such properties, others invests in real estate-backed loa ns such as mortgage and mortgage securities.
They focus more on long-term capital appreciation, providing a reliable stream of income for investors and have a higher total returns and lower overall risk.
• Commodities: these are raw physical products you can invest in, examples include Precious stones, Metals, Energy, Agricultural products etc.
It provides investors with diversification and a hedge during inflation, it can be traded physically but most times through future contracts which are traded on commodity exchange, where buying and selling of these Investment is agreed upon for a particular price at a specified time.
With future contracts, commodities traders bet on how commodities' price will go. When the price is thought go up, you buy them or go long and when it is thought to go down, you sell them or go short. They have good returns rate but flunctuate wildly due to the effect of price on the change in demand and change.
Without much expertise, investment can be done online anywhere successfully with the aid of robo-advisors which happen to be cheaper than financial advisors and is made available on several investment platforms.
Unlike in previous years, there are several online investment platforms available now which also provides the option of buying and selling investments from the comfort of one's abode with just a mobile phone. They differ from one another by the investments and services they offer as well as their fee, so it's advisable to check through a good number of them to be sure they can deliver what you want.
I mentioned different platforms that offer several investment in the previous article, "Why young adults should invest in 2022" ,https://link.medium.com/Xff5U8KRinb,accessed February 16, 2022.", except for REITs which includes Fundrise, Streetwise, Realtymogul, Cadre etc and Commodities which includes eToro, Upstox, TD Ameritrade etc.
Among the several benefits and merit online brokerage platforms have, the major ones includes that;
• they are easier and more accessible even for beginners,
• they are cheaper in terms of fee compared to offline brokerage firms which make use of agents or brokers,
• you can carry out your investment at anytime of the day and from anywhere.
Bottom line, to make your first Investment;
- Decide on how you want to invest and the investment instrument(s) you want to invest in,
- Decide the amount you want to start your investment with,
- Choose the brokerage platform that suits your needs whether online or offline and open an account with them,
- Fund your account and make your investment.
