Key Highlights

1. There are a variety of investment options available in Nigeria, from low-risk options like investing in bonds and T-bills to high-risk assets such as stocks, cryptocurrencies, and Foreign Exchange (FOREX) trading. It’s crucial to assess your risk appetite before diving in.
2. A diversified portfolio, i.e., investing across different asset classes —such as stocks, mutual funds, commodities, ETFs, etc., —can help balance risk and maximize returns.

 

Investing money in Nigeria can be complex especially if you are a newbie in financial markets investment. You've got a wide range of investment options you can choose from, and each comes with its own risks and potential rewards. It's crucial to know your options so you can make informed and smart choices. Whether you have a low-risk appetite and want something “risk-free” like Bonds or Treasury Bills (T-Bills), or perhaps you're up for bigger risk with stocks or cryptocurrencies where you could win big or also lose significantly; figuring out where to begin can shape your financial future! That's where we come in at CSL Stockbrokers Ltd, making things easier for you, giving you expert advice, and creating solutions just for you, so you can feel safe and sure about your investment decisions. This article seeks to explain part of a broader discuss when it comes to investing in the Nigerian financial market.

 

Low-Risk Investment

Bonds

A bond is a fixed-income investment that represents a loan made by an investor to a borrower, usually corporations or governments. They are called debt instruments, given that as an investor you're simply giving a loan to the issuer or borrower, who agrees to pay you a set interest rate or fixed amount for a certain duration of time. Hence, they are also referred to as fixed-income securities. The borrower pays back the investment capital to you at the end of the investment tenor, i.e., when the bond matures. Bonds issued by the Nigerian government are called FGN Bonds, while those issued by state governments and corporations are called Sub-National Bonds and Corporate Bonds. Examples of existing bond instruments in the Nigerian financial market are the domestic FGN Bond, FGN Sukuk Bond, FGN Savings Bond, domestic FGN US Dollar Bond, to mention a few.

Pros

• Suitable for capital preservation.
• Regular interest payments.
• Long-term investment planning.
• Investment in FGN Government Bonds plus interest income on the instruments are tax exempt (except for short term FGN securities such as T-bills and promissory notes).

Cons

• Limited returns compared to stocks.
• Rising interest rates can lead to a decline in bond prices and by proxy, loss in capital if an investor decides to sell in the period.
• A downgrade in the issuer’s credit rating could decrease the bond's market value.
• Some Nigerian bonds may lack a liquid secondary market.

 

Treasury Bills (T-Bills)

The Central Bank of Nigeria (CBN) issues Nigerian Treasury Bills (T-Bills) on behalf of the federal government. T-Bills are short-term government-backed securities that have a maximum maturity of 1 year. T-Bills do not have regular interest payments like bonds, rather they are sold at a discount, which means investors pay less than the actual value at the point of purchase and gets the full value (or face value) at maturity. The difference between what is paid and what is received at maturity is the interest or return on investment (ROI) which is received upfront. T-Bills are classified as low-risk investment instruments.

Pros

• T-Bills are considered one of the safest investment options as they are backed by the Nigerian government.
• T-bills can be a steady source of income, allowing investors to plan their finances more effectively.
• A maximum maturity of one year provides a viable short-term investment option.
• T-Bills can be easily bought and sold on the secondary market.

Cons

• T-Bills offer lower yields, compared to other investment options like corporate bonds or stocks.
• The return on T-Bills may not keep pace with inflation.
• T-Bills is a relatively low-risk investment option, limiting the potential for significant capital gains.

 

High-Risk Investments

Stocks

A stock is a form of security that indicates the holder has proportionate ownership in the issuing company and is sold predominantly on stock exchanges like the Nigerian Exchange Group (NGX) in Nigeria. It is also known as equity, and units of stock are called shares. The shares entitle the owner to a proportion of the company’s assets and profits equal to how much stock they own. There are two main ways to earn money by owning shares of stock: 1) when the stock price goes up (capital appreciation), and 2) when the company make cash or shares distributions of company profits (dividends). Keep in mind that investing in stocks are deemed risky because of the volatility in prices which can occur with changes in the economy and in the overall market dynamics.

Pros

• Stocks have the potential to offer significant returns over time, especially in a growing economy like Nigeria.
• As a shareholder, you own a slice of that company and can earn through capital appreciation and dividends.
• Stocks are easily bought and sold on the Nigerian Exchange Group (NGX) through a stockbroker like CSL Stockbrokers Ltd, providing liquidity for investors.
• Stocks can provide a diversification benefit when added to a portfolio, balancing overall risk and improving returns.

Cons

• Stocks are considered high-risk due to market volatility.
• Stock prices can fluctuate rapidly, making it difficult to predict returns.
• Changes in regulations or government policies can negatively impact the stock market.

 

Mutual Funds

A mutual fund is an investment vehicle made up of a pool of funds collected from numerous investors for the purpose of investing in securities such as stocks, bonds, money market instruments and other securities. Managed by professional fund managers, these funds are a popular choice for beginners and experienced investors alike. In Nigeria, you can find mutual funds offered by CSL Stockbrokers Ltd and other financial firms. These funds give you a way to put your money into various assets without needing to know a lot about the market.

Pros

• Mutual funds are managed by experienced financial experts, benefiting investors who lack investment expertise.
• Mutual funds invest in a wide range of assets, helping you mitigate individual risks as an investor.
• Mutual funds often have relatively low minimum investment requirements.
• Investors can easily buy and sell mutual fund shares, providing flexibility in managing their investments.
• In Nigeria mutual funds are regulated by the Securities and Exchange Commission (SEC), providing a level of investor protection.

Cons

• Mutual fund investors have little or no direct control over the investment decisions made by the fund managers.
• The performance of some mutual funds can be volatile, largely due to the volatility of the underlying securities in the fund portfolio.
• In a diversified portfolio, the impact of successful investments may be diluted by underperforming assets.

 

Commodities

Investing in commodities like gold, silver, oil, and agricultural products involves buying and selling actual goods or derivatives based on these items. In Nigeria, you can trade commodities through different channels such as commodity markets, brokerage companies, and online trading exchanges. Commodity investment can be deemed risky and unpredictable, given that the dynamics of trading in commodities are largely swayed by economic realities and market dynamics peculiar to the underlying commodity being traded. However, commodity trading also offers you opportunities to make big gains when the commodity prices rise.

Pros

• Commodity prices can be volatile, providing opportunities for significant gains when prices rise.
• Certain commodities, like gold, are often viewed as a hedge against inflation, which can be particularly relevant in the Nigerian context.
• Adding commodities to a diversified investment portfolio can help reduce overall risk.
• Investing in commodities like gold, oil, and agricultural products can provide exposure to important sectors of the Nigerian economy.

Cons

• Investing in commodities is often considered a speculative endeavour, rather than a long-term investment strategy.
• Navigating commodity markets and understanding the factors that influence prices can be more complex than traditional equity or fixed-income investments.
• Changes in government policies or regulations, particularly in the oil and gas sector, can significantly impact commodity prices and investment returns.
• For physical commodities like gold or silver, investors may need to consider storage and logistics, which can add additional costs and complexity.

 

Exchange-traded funds (ETFs)

Exchange-traded funds (ETFs) are investment funds that trade on stock exchanges just like individual stocks. They aim to track how a specific index, sector, or a “basket” of securities (such as shares, bonds, commodities, etc.) trade. In Nigeria, ETFs have become popular because they allow investors to spread out their investments without buying each asset on its own. This makes ETFs an easy and effective choice for investors who want to diversify their portfolios as they provide investors with the opportunity to diversify their investments at relatively lower costs and gain exposure to different asset classes and strategies. For example, when you buy an ETF that tracks the NGX 30 Index, it gives you ownership and the performance of all the securities listed in the NGX 30 Index, i.e., the top listed 30 most capitalized stocks on the NGX.

Pros

• ETFs generally have lower management fees compared to actively managed mutual funds, allowing for potentially higher returns.
• With one transaction, investors can hold a diversified portfolio.
• The ability to trade ETFs throughout the day means investors can quickly convert their investments into cash.
• ETFs can be bought through standard brokerage accounts, just like individual stocks, simplifying the investment process.
• ETFs can provide exposure to various asset classes, including stocks, bonds, commodities, and real estate, allowing investors to tailor their portfolios.

Cons

• Some ETFs may also incur costs related to trading and market impact, which might not be immediately apparent to investors.
• Investors have no control over the specific assets within an ETF.
• ETFs with international holdings are also exposed to risks related to geopolitical events, economic instability, and market regulation in other countries.

 

Foreign Exchange Trading (FOREX)

FOREX, or Foreign Exchange trading, is about buying and selling currencies in the global financial market. More people in Nigeria are venturing into FOREX trading because of the potential to make a lot of money in a very short time. But it's also one of the riskiest ways to invest your funds. People who trade FOREX make money by anticipating how the prices of different currency pairs will move after careful analysis (both technical and fundamental), hoping to profit from the volatility in exchange rates.

Pros

• The FOREX market operates 24 hours a day, five days a week, providing continuous trading opportunities and high liquidity.
• FOREX trading can provide Nigerian investors with exposure to a global asset class, potentially diversifying their investment portfolio.
• Traders can profit from both rising and falling currency prices, as FOREX trading allows for both long and short positions.
• FOREX trading allows the use of leverage, meaning traders can control large positions with a relatively small amount of capital, potentially leading to high returns.
• Traders can choose from a wide range of currency pairs, including major, minor, and exotic currencies.

Cons

• Leverage trading, while offering the potential for high returns also amplifies losses, making it possible to lose more than the initial investment.
• The need to constantly monitor the market and make quick decisions can be stressful, leading to burnout or poor trading choices.
• Successful FOREX trading requires a deep understanding of market dynamics and technical analysis.
• The fast-paced nature of FOREX trading can lead to emotional decision-making, resulting in impulsive trades and losses.

 

Cryptocurrency

A cryptocurrency is a digital or virtual currency that uses cryptography to stay secure. It possesses the attributes of both money and securities. Like money, some cryptocurrencies can be used to buy goods and services, while other crypto projects are akin to securities or investment, with the expectation of future profits. Bitcoin, Ethereum, and other cryptocurrencies operate on decentralized networks based on blockchain technology. In Nigeria, cryptocurrency trading has gained significant attention due to their potential for high returns in very short timeframe, the ease of setting up a trading account on most online cryptocurrency exchange platforms, and the low-level complexity and bottleneck associated with moving cryptocurrency assets across international borders at the convenience of an internet-enabled mobile device. However, they also come with high risks, including market volatility and government regulatory uncertainty. There is currently no legislation prohibiting cryptocurrency in Nigeria, with the Central Bank of Nigeria (CBN) approach to regulating it being in the form of directives or guidance to its regulated entities, including banks and other financial institutions. More recently, the Securities and Exchange Commission (SEC) in Nigeria issued Quidax, an Africa-based crypto exchange, its first provisional operating license, a development which signals the beginning of formal recognition and regulatory oversight for the country’s digital asset industry.

Pros

• Cryptocurrencies have shown the potential for significant price appreciation in a short time.
• Being an emerging asset class, investing in cryptocurrencies early could lead to high returns as the technology and market mature.
• Cryptocurrencies enable seamless, cross-border transactions without the need for intermediaries.
• Cryptocurrency markets operate 24/7, offering flexibility for investors to trade at any time, unlike traditional financial markets.
• Including cryptocurrencies in a portfolio can significantly improve the return potentials, balance risk, and provide exposure to a new rapidly growing asset class.

Cons

• Much of the value in cryptocurrencies are driven by speculation, increasing the risk of bubbles and sudden crashes.
• In Nigeria, uncertainties still surround the hitherto government imposition of restrictions on cryptocurrency transactions, creating uncertainty and potential legal risks for investors.
• Cryptocurrencies are susceptible to hacking, phishing, and other forms of cybercrime, leading to potential loss of funds.
• Once a cryptocurrency transaction is made, it cannot be reversed, leaving investors vulnerable to fraud or mistakes.
• Managing cryptocurrency wallets and private keys can be complex, with mistakes leading to permanent loss of funds.

 

Conclusion

Navigating the investment landscape in Nigeria may seem complex, but knowing the main investment options can help you make smart choices that match your investment goals. You've got several choices, from safer investment options like bonds and T-bills to riskier options like stocks, mutual funds, and new asset classes like crypto. Each option has its own risks and rewards, so picking the right mix is key to building a strong portfolio. Whether you’re a beginner seeking stability or an experienced investor exploring high-return opportunities, there's a path for you.

If you need expert help and tailored investment plans, team up with CSL Stockbrokers Ltd. Our staff is ready to assist you get the most out of your investments and secure your financial future. Begin your investment journey with CSL Stockbrokers Ltd now.

 

 

 

 

 

 

Important Risk Warnings and Disclaimers

CSL Stockbrokers Limited ("CSLS") is regulated by the Securities and Exchange Commission, Nigeria. CSLS is a member of the Nigerian Stock Exchange. CSL Capital (UK) Ltd (Firm Reference Number: 913994, Registered Number: 11818051), trading in the name of 'CSL Stockbrokers' for its activities, is authorized by the Financial Conduct Authority (FCA).

Both CSLS and CSL Capital (UK) Ltd are members of the FCMB Group ("the Group") of Nigeria, a group of companies which also includes First City Monument Bank Ltd.

RELIANCE ON THIS PUBLICATION FOR THE PURPOSE OF ENGAGING IN ANY INVESTMENT ACTIVITY MAY EXPOSE YOU TO A SIGNIFICANT RISK OF LOSS. By receiving this article, you will not be deemed a client or provided with the protections afforded to clients of CSLS and CSL Capital (UK) Ltd. When distributing this article, CSLS, or any member of the Group is not acting for any recipient of this article and will not be responsible for providing advice to any recipient in relation to this document. Accordingly, CSLS or any member of the Group will not be responsible to any recipient for providing the protections afforded to its clients.

If you are in the UK, you are a person to whom either Articles 19 or 49 of the Financial Services and Markets 2000 (Financial Promotion) Order 2005 apply or a person to whom this communication may otherwise be lawfully made.

This document is not an offer to buy or sell or to solicit an offer to buy or sell any securities. This document does not provide individually tailored investment advice. It has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. The appropriateness of a particular investment will depend on an investor's individual circumstances and objectives. The investments and shares referred to in this document may not be suitable for all investors.

CSLS or any other member of the Group may effect transactions in shares mentioned herein and may take proprietary trading positions in those shares and may receive remuneration for the publication of its research and for other services. Accordingly, this document may not be considered as objective or impartial. Additionally, information may be available to CSLS, or the Group, which is not reflected in this material. Further information on CSLS' policy regarding potential conflicts of interest in the context of investment research and CSLS' policy on disclosure and conflicts in general are available on request.

This document is based on publicly available information obtained from sources which CSLS believes are reliable, but which it has not independently verified. Neither CSLS, or their advisors, directors or employees make any guarantee, representation, or warranty as to the accuracy, reasonableness or completeness of this information and neither CSLS or their advisors, directors or employees accepts any responsibility or liability whatsoever (in negligence or otherwise) for any loss howsoever arising from any use of this document or its contents or otherwise arising in connection with this document. The opinions contained in this document are subject to change without notice and are not to be relied upon and should not be used in substitution for the exercise of independent judgment.

Past performance is not a guarantee of future performance. Investments may go down in value as well as up and you may not get back the full amount invested. Where an investment is denominated in a currency other than the local currency of the recipient of the research report, changes in the exchange rates may have an adverse effect on the value, price or income of that investment. In case of an investment for which there is no recognized market it may be difficult for investors to sell their investment or to obtain reliable information about their value or the extent of the risk to which they are exposed.