Short Note on Investment

Short Note on Investment

1. What is Investing? It is the act of giving up the present utility of some asset -such as money- for the potential to grow that asset in future.

It should be noted that all investing carries risk...

Example For Clarification: Miss Taye has ₦1,080:00 (about $3:00) which was given her by her elder brother Pamilerin. Instead of using this money to buy shoe, she decided to use it to buy shares in a Stapler Company. However, due to market fluctuation, the stocks (shares) plummet to ₦720:00, ($2:00) two weeks later. This pained Taye, for she has lost ₦360:00 of her money. However, at the expiration of the 4th week, the share rises again to ₦1,080:00 ($3:00). And Taye felt well, I don’t want to take the risk again, thus she withdrew her investment/stake into the stapler’s company.

Because Taye did not gain anything from the investment, she has lost. Why has she lost? She has lost because she could have used the money 4 weeks ago.

However, Taye felt that it is better to play it safe which was why she withdrew or got back her investment, but economically speaking, she is considered a loser because of the length of days she had put the money into the shares.

2. Risk And Reward When a bank/Co-operative Society/Individual Lenders etc lends someone money, they are making an investment as well as taking a risk.

Assume High-Crown-Help-Services, a lending body in Nigeria or any Co-operative body etc borrows someone money, this is what she is doing:

i. Sacrificing her ability to use the money that is opportunity cost,

ii. Exposing herself to risk that the person may not payback, which is the Principal money that is the money borrowed the person may be lost.

I think you see what those borrowers pass through?

Role of The Interests: The interest a borrower pays is to compensate them for the risk/s they have taken.

This should suggest to you why the individual lenders' interest rates are usually higher than even banks, because they are thinking about the risks involved.

3. On Bond * Bonds are publicly-traded and involves borrower, lender, risk and interest. * Company bonds can be bought as well as States or Federal Government. If one does this, it means the person is issuing a loan to the company or state or Federal Government, while the company or state or Federal government is the borrower.

Example For Clarity. If Mr. Rotimi buys a corporate/state/Federal bond, it means Mr. Rotimi is giving the state/Federal etc a loan.

From the above, it reveals that Mr. Rotimi is sacrificing his hard-earned cash, the ability to use the money that day for other things and he is exposing himself to some risks of loss.

Bond's Compensation * Paid interest on that bond, however, buying into government bonds may attract low interest because it is sure that she will pay back the money owed.

* Default Risk: How likely the person/organization etc shall pay back is called default risk.

* This is why private lenders' interest rates are high because they feel the person may not pay back, * Co-operatives interest rates are lower because they feel they have some data about you and can lay hold on your sureties to pay-back if defaulted.