Small vs big (Pt 4)

Chapter 4

Many times, people are so over concerned about going to school, making a good result and securing a good job. Even atimes, we despise the uneducated in our society. The idea of making good grades doesn’t secure your future in anyway. The idea of securing your future dwells with people with great ideas. Ideas that can be changed to wealth. Nowadays, companies do not just employ an individual because of his good grades but because of the ideas such individual has to maneovre the company to success. Most people have just a way of making money which is via their jobs. They cherish such jobs because they feel it is a product of their hardwork but what is hardwork?
Hardwork is not really what people think it is i.e. putting your whole time, body and mind to the job you are doing (Dedication to work). Father it is working smartly. Earned income is a form of linear income which comes after each job done. Other forms of incomes are needed to be a wealthy person. Many people do not know this because they are too addicted to what they are being taught at school. Like I said before these skills cannot be taught but can only be learned. The basics in academics is that people find what they’ve been taught to look for. Most students leave school when they are not mature for the society. Maturity not in terms of age but in terms of mental maturity. You’ve got to use your intellectual know – how to get more ways of making money.
Note: I’m not referring to illegal tactics. The other form of money gotten outside what you earn is called residual income. Money is a great worker, once you put it to work, it puts extra cash in your pocket without you having to raise a finger.
Stocks are likely to be the best investment, you’ll ever make outside Real estates. You don’t have to feed pay to maintain stocks because it does not leak like the roofs of houses etc. Buying a stove entails owning a part of the company which is issuing the stock.
Investment is the general term used to describe making money outside your income.
Wealth suit having move money but enjoying more money living a life of complete slavery to the course of wealth generation is complete poverty. Buying stocks is generally a very risky business. When people consistently lose money in stocks, the fault most often than not is always on the part of the investors. They simply do not have a plan. These are people who buy at very high prices, run out of patience and sell at relatively low prices during one of those periods when the values of stocks go down. To invest, you need a plan and most importantly in stocks. You’ve got to play the people and institutions who play in the stock market and not the stock market in order to succeed in stocks. Some people who make up the stock market are motivated by the short term results of a company. People are often pushed to buy stocks because of the headline reports, such people are described as “momentum investors”. The short-term mentality of the stock market sometimes raises or lowers the values of some companies. Others are those who trade in the market. This means buying stocks when the market is on the rise and disposing of them when the market gets sour. The stocks selected are always among those that have behaved above market average. Here a very few persons are involved in this with a vast majority of them being the unskilled investor (in investor that is always very scared of losses in the market). They sell the stocks when their values increase and later buy-back them stock when their value reduces. Majority of the time, stocks they sell do not really belong to them but are borrowed via the activities of the stock exchange. Before we continue, let us define certain terms in association with stocks.

Shares

A share confers on you part ownership of a company offered for sale to the public. Some companies do not trade their shares and as such are regarded as private companies. While firms that do are regarded as public companies.

Ordinary Stockholders

These are always the last people to be paid after the creditors have been paid.

Preferential Shareholders

These are the first class of shareholders to be paid and their income is fixed.

In investing, you don’t have to be a math genius to be a successful investor in stocks, all you need is a plan. Time is the second most important factor in investments in stocks after you’ve got a plan. Your parents may know more about stocks than you do but they’ve not got the time you’ve got. A small money invested today is worth more in the long run than a huge amount invested later.

Twenty years or more is the right duration for stocks to rebound from the worst market depressions and file up profits for you. Stick with your stocks, ignore the side talks. The secret to being wealthy in shares is buying stocks in good company which have an excellent record of past growth which may be predicted likely to continue on the future or choose companies which have not shown impressive results yet but has a positive forecast. Such are always consumer products companies. Before you embark on investing in any company, make sure you carryout an in depth study of the company before making such purchases. Many people follow experts that make forecast at the stock exchange or their financial advisors which is very wrong. By studying the reactions of people towards certain commodities (market trends), you develop knowledge of the market for such commodities and you can make your own forecasts. Familiarity breeds complacency. The more familiar a stock is to us, the less we carryout proper analysis of the stock.

Nobody can predict exactly when a bear market will arrive and when one does eventually arrives, the prices of most stocks drop in unison, many investors get scared and they worry that their investments may eventually be wiped out. They try to salvage their stocks by putting them up for sale even at magnificent losses. They show a great deal of cowardice letting their emotions take a better part of them without reconsidering what they are doing lose a great deal of money voluntarily. These are the so called market timers, who’d sell stocks because the market is up or down. Nobody can outsmart the market.

To get the best out of stocks, especially for we that are very young and have time on our sides is to invest money you can afford to forget about forever. Leave them in the market through booms and depressious. What the so called “market timers” do not know is that in retaining such shares, you’ll never make a loss.

One very tough decision to some people is picking their own stocks. So for these people, its better leaving the job in the hands of the experts. The only task such people perform is just the funding of such investment. Your money is put together with a lot of other peoples money whom you may not know and is invested by the experts on your behalf. Such is applicable to insurance and the pension scheme. As soon as you sign in with a fund, you instantly become a shareholder in all the companies the fond buys, no matter the amount you invest. A major advantage of investing in mutual fond companies is that it less risky than owning stocks in just one company.

Mutual funds originated from the Netherlands by King William I of the eventually, the idea has spread to over sixty countries.

The best experts cannot redeem you during bull markets.

Picking you own stocks could be fun so far as you have the discipline. It is much more load than investing in mutual funds, where you leave the experts to invest on your behalf. Here; you pick your own stocks and you fund such stocks. Some people invest in mutual funds and at the same time, pick their own stocks. Some mutual funds provide the benefits of having some one else manage your investments, keep your account records and diversify your investments over many securities that may not be available or affordable to you otherwise. One major advantage of the fund is enjoying economics of scale. Dealing cost is lower than for those trading individual shares themselves. Because of the dynamics of financial markets you do not need to worry about the timing of adjustments to your portfolio.

Secondly, you are exposed to a wide range of investments and so you are not vulnerable to the risks of holding a handful of individual shares. It encourages diversification which is a good investment strategy. Diversification of your stocks investment across a wide range of companies reduces the risk of the failure of one company or sector.

Mutual funds are affordable. They accommodate investors who do not have a lot of money to invest by setting relatively low Naira amounts for initial purchases subsequent purchases or both. Mutual funds provide liquidity, investors can readily redeem their shares at any time.

The first mutual fund was registered by the securities and exchange commission (SEC) in 1991. now with about 20 registered funds, investors have since invested about N20billion. Although this does not stand a per with the $6million invested in mutual funds in America.

Now let’s look at why mutual funds are not thriving in Nigeria as compared to developed markets. They face a lot of challenges in the market which they operate. Firstly, a vast majority of Nigerians are low income earners. Their income is barely enough to cover all their primary needs let alone to be invested. In addition, the high level of illiteracy in the country effectively cuts out a substantial part of the population who otherwise may have invested in mutual funds if they had the level of literacy required to be informed on such issued.

A lot of work needs to be put into the education of the public (public awareness) on mutual funds, how they operate and the benefits of investing in them. Given the fact that the Nigerian financial market is essentially still at the developing there are very scarce options made available to the investor and are not as diversed and varied as is obvious in other countries. What makes a good investment is absolutely subjective and depends on the rationale of the investment, that is the plan of the investor whether long term or short term in terms of the period of investment and also whether the intention of such investor towards the fund is for capital appreciation, provide a steady income stream or a hybrid of these factors. Moat importantly is that maximum value is gotten from investment while simultaneously ensuring minimal risks. You can buy mutual funds directly from the companies that manage them. You can also go through a broke, but be sure to investigate the fund properly long-term investors should ignore all bond funds and those funds that invest in a combination of stocks and bonds. Go through past records of funds before investing in any of them. Also look at the managerial team, and ensure that the fund you invest in has the right managerial team to give you what you want. Some of the funds that have solid past records do not still have the managerial team that took it to that height. Invest in funds that have sailed through the good and bad time.

Now another difficult problem is what types of funds to choose from. Because mutual funds have specific investment objectives such as growth of capital, safety of principal, income and hedging of against depreciation in Naira, you can select one fund or any number of different funds to help you meet your specific goals. Mutual funds fall into the following groups:

- Equity funds: These funds invest in shares of common stocks.
- International funds: Seek resources to invest outside Nigeria. These funds provide investors ample opportunities to avoid putting all their eggs in one basket. Some investors are unfamiliar with foreign investment policies and currencies and may not have a dear understanding of how economic or political events affect foreign securities. An investor in international fund doesn’t have to worry about trading practices, record keeping time zones or the laws and customs of foreign countries because the fund handles all of them.
- Fixed income funds: Are funds that invest primarily in corporate or government bonds and stocks that have a fixed rate of return. Their objective is to provide a high current income consistent with the preservation of capital. Capital growth is of secondary importance. This type of funds are suitable investors who want to maximize income and who can assume a degree of capital risk in order to achieve this.
- Money market funds: Provide stability of capital while seeking a moderate to high current income. Their investment is very liquid, short-term debt securities and have no potential for capital appreciation. Such funds are suitable for investors who want high stability of principal and moderate current income with immediate liquidity (easily redeemable).
- Sector funds: Invest in securities of a specific sector of the economy such as oil and gas, banking etc. they do not offer the sort of risk protection found in funds that invest in a broad range of industries. Although, there is always diversification among several companies via within their sector of operation which is still better than investing in just one company. Sector funds offers, sharp capital gains in cases where the funds sector is in favour but also offers the risk of capital losses when such sectors are out of favour.
Before you go into mutual funding you’ve got to have a plan. Here is a list to guide you.
- Instead of starting your evaluation of a fund with its performance, think about your investment goals-whether you are looking for a current income or an investment for a short-term, then a bond is good for you. If you have a longer-term goal, you might consider an equity fund. If you want appreciation of capital, you need a fond that; invests most, if not all of its assets in stocks. Stock prices fluctuate everyday, so funds that invest in stocks will also fluctuate in value daily.
If what you want is a stream of income, you’ll need funds that invests in debt securities such as bonds. Like stocks, bonds experience fluctuating share prices, although of a lesser degree. If you want to preserve your capital, you will need a money market fund, which maintains a stable share price while providing some income. In return for this stability you have to make do with less income than if you invested, in a bond fund. To seek a bit more income, without sacrificing too much stability of principal, you could choose a short term bond fond. This experiences modest price fluctuations but with higher yields than money market funds.
- Ensure that you are satisfied with the level of management and you are okay with business strategy of the company. Make sure that the company frankly discusses the potential limitations if not you’re getting into a very deep mess. Ensure that the company sticks to what is outlined in its prospectus if not you may be going contrary to your plans. The cost is another major point of concern, there are some funds who marge a lot before you can become a shareholder and this may not be good. Follow the managers records and be sure the company suits your plan.
- Be acquainted with the various prices of funds you wish to invest in every fund has and expense ratio money deducted from its earnings and assets to pay annual operating expenses. The lower the expense ratio, the more the returns the shareholders are certainly going to receive from such funds. Go for funds with high turnover ratios.
- Once you have chosen a fund type, the next step is to evaluate the funds in such category. Read the company’s prospectus carefully. To find out how well a funds performance as been, you have to compare it to its rival funds in the fund type you have chosen.
The bench mark index is also very important, compare the fund to the NSE index to be certain of its creditability.
- Are your interests protected? Excessive trading by just a few of a fund’s shareholders can disrupt operations and boost expenses that all shareholders have to absorb. If you’re a long-term investor, look for policies that protect your interests. Some fund companies limit the number of transactions investors can make within a given period. Some funds hold down trading shares before they’ve been held for a specified period of time. This type of fee which may range between 0.25% to 2% is not a sale fee, because it is paid directly to the fund and not the fund company to offset the costs incurred by the redemption activity. Check the record keeping services of the companies. Some people take record keeping unseriously until they buy funds from bad fund companies. Fund companies offer statements of accounts, and other services that make record keeping convenient for fund holders. Example; before you invest in a taxable account, make sure the fund keeps track of the cost basis of your shares over time. If not, you’ll have a problem keeping records when you decide to redeem your shares.
To know if your funds are doing well, at the end of each financials day, the fund manager calculates the value of the various holdings of the fund. The liabilities of the fund are then deducted from this value. The result of this is called the Net asset value (NAV). Dividing this value by the number of shares in the fund amounts to the Net Asset Value per share which is the price of a single share for that day.
If the company is doing a good job, the NAV per share increases in value and if conversely, if the company has a poor managerial team, the NAV per share reduces in value per day. In the fund investment, you can earn money via.
- Dividend payment: This includes the dividends and interest on the securities the company invests in. the fund pays its share holders nearly all the income except some minor expenses that would be made mention to the shareholders.
- Capital gains distribution: The price of the securities a fund owns may increase. When such securities are sold, the fund makes a capital gain. At the end of the year, most funds distribute such capital gains to investors.
- Increased Net Asset Value (NAV): If the market value of a fund’s portfolio increases, after deductions of expenses and liabilities, then the NAV of the fund and its shares increases. The higher NAV reflects the higher value of investment.
When you invest in a fund, and the expected result is not made manifested, there is no need holding on to such funds. Let us look at good reasons why you should dump a fund.
- Your fund is a persistent loser: The mere fact that a fund has how returns or even losses shouldn’t prompt you to sell. If there is a bear market, you cannot expect your fund manager to turn to Christ. But if this happens for two to three years, by a substantial margin, start thinking of another fund.
- The fund’s investment strategy has changed: If you want a diversified portfolio, then you’ll probably pick up equity funds. Supposing the equity fund managers strays from their area of concern, they’ve not only strayed, but they are leading you astray from your plans. There is no need having a second thought here unless you are willing to also change your plan.
- Change in managerial team of there’s a new manager for the fudn, he may not abide by the same rules, his predecessor abode by. Ensure that he does not down turn your funds to make losses otherwise you quickly pack from such funds.
- The fund managers are not straight forward: Some of the professional fund managers are often not knowledgeable in fund handling and as such make sure you are satisfied with the managers in charge at present.