The initial phase of your investment journey is where you need to put most of the effort. Many individuals face drastic outcomes with their initial investments due to a lack of precautionary measures and experience. This leads them to steer away from the investment world as they also advise their friends and relatives against investing.
Considering several precautionary measures and taking informed decisions is very important at every step of investment in any capital market. Following are the necessary measures to approach and navigate through capital markets in Nigeria.
- Start by Learning
The first step towards a rewarding investment journey is learning. Before you put your hard-earned money into capital markets, it is important to educate yourself with every element of the concerned market.
If an asset class or financial instrument has provided impressive returns in the past, it does not mean that it would continue to do the same in the future. Capital markets with high return generating ability also tend to be riskier. While the markets with minimal risk tend to generate lower returns; which in some cases are below inflation returns or opportunity cost.
Each Asset Class and Instrument carry different risk factors and their prices can move differently due to multiple reasons. By learning about the efficiency and efficacies of asset classes and instruments, the selection of suitable instruments becomes easier.
- Develop and Ameliorate Strategy
Investing is a strategic process and one must develop and enhance their investment strategy.
The investment strategy can be improved by analysing the shortcomings with time. Those who invest without a strategy & assessment of risk or downside are more likely to face drastic outcomes.
For beginners, it is advisable to gain decent experience through trade simulators with historical market data and demo accounts. This allows the new investors to grasp a decent idea of price movements and the functioning of capital markets without risking their money. The demo accounts can also be used to back test strategy and identify the shortcomings.
- Researching the Market and Finding Opportunities
By spending adequate time and effort in research and analysis, you can find better opportunities to make profit-making decisions.
Generally, gold and commodity prices increase when the stock prices in the equity market and interest rates in the bond market slip downward.
Similarly, each asset classes follow different price trends. With research and experience in capital markets, you can enhance the timing to enter or exit the markets to attain better outcomes.
Your research and analysis efficiency are much likely to be reflected upon your investments. It is a necessary step that can separate suitable and money-making instruments from bad ones.
- Be Smart, Informed, and Stay Vigilant
Being smart and informed can grant you an upper hand over others in any segment of life.
For investing, it is very important to stay vigilant and pay attention to every event that can possibly affect the prices of financial instruments. Apart from paying attention to markets, investors also need to focus on the following measures.
- Don’t fall for fake investment schemes or scams
There are thousands of scammers and conmen in the capital markets of Nigeria and all over the world. Due to substantial demand in the investment sector, more fake brokers, investment agents, and schemes are emerging each day. These scammers seek to take advantage of your ignorance.
Fake brokers or investment schemes are quick to accept your deposit but may involve complexities in withdrawal. The fake investment agents or schemes can also disappear after accepting your deposits.
The regulation, transparency of financials, details of owners, and reviews by experts and ex-clients can be checked to assure investor’s safety. Selection of brokers and investment channels should not only be done on the basis of fees and commission. The fake brokers often try to attract newcomers with cheap pricing and high leverage.
- Only Invest in what you Understand and what you can Afford to Lose
With decent profits on initial investments, new investors often invest substantial amounts without considering the risk factor or the potential downside. Such investors are more likely to lose more than they can afford in unfavourable market trends. The use of high leverage can further extend these losses.
Investors need to have an understanding of the functioning of capital markets before investing bigger amounts.
Diversifying the portfolio has proven to be a risk-mitigating strategy but over diversifying may lead to selecting unsuitable asset classes and instruments. One must always select suitable financial instruments after research and proper understanding.
- Invest Yourself and Don’t Let Others Invest for you
Ignorance of capital markets but fear of missing out often direct investors in search of someone who can invest for them. Friends, relatives, or agents taking investment decisions on your behalf can lead to drastic outcomes. They might make an investment decision for their personal advantage which may not be suitable for you.
Taking advice and ideas from experienced investors and professionals can be helpful but the final decision to invest should be yours. This decision should be reached after adequate research on basic details, price movements, risk, and checking suitability with the investment objective.
By doing so, even in the case of unwanted outcomes, you will gain experience to enhance your strategy in the future. This is better than blaming others for your losses.
- Don’t Rely on Word of Mouth or Unsolicited Advice/Chatter
With the availability of so many sources of information, it is important for a smart investor to separate fake news from authentic ones.
Although, it is always good to stay updated with news and information concerning the capital markets, but reacting to information received through unreliable sources is never a good idea.
Unreliable and unsolicited advice can act on self-interest for the advisors. Your friends and relatives will advise you to invest in instruments they have invested in. These instruments may be ideal for them but may not be suitable for you.
- Only Invest Using Licensed Brokerage/Fund Manager
For a safe and rewarding investment experience, it is important to choose a legitimate investment service provider. Investors must be able to identify the fake elements of the investment world by checking the investment provider’s license. Choosing a licensed financial services provider helps you get protection, safety against malpractice of the provider and you can file for grievance redressal with the regulator.
The brokers and agencies offering bonds, equity, and derivatives should be licensed by the Nigerian Stock Exchange (NGX) and Securities and Exchange Commission of Nigeria (SEC), or relevant financial regulatory bodies of Nigeria. And investors can file a complaint in case they have any dispute/grievance with registered stock brokers. Investors can even check track record of dealing members through NGX BrokerTraX before choosing a broker.
Mutual funds, unit trusts, and other pooled investment instruments should be managed by licensed fund managers and asset management companies. The SEC of Nigeria is the regulatory authority responsible for regulating and licensing fund managers in Nigeria. One can submit complaint with SEC for any dispute against licenced managers.
Cryptocurrency, forex, CFDs are not yet regulated in Nigeria. In such a case, choosing renowned and trustworthy forex brokers with offices in Nigeria that are regulated by foreign regulatory authorities like FCA or CySEC can be considered safe. Investors can file complaint with FCA or CySEC against these brokers in case of dispute.
- Manage and Allocate Funds Properly
New and inexperienced investors often lack money management and budgeting skills. When making an investment, it is necessary to manage your allocation in capital markets according to your investment objective.
The initial step towards money management is to identify the proportion of spending and saving amount from your income. This depends entirely on your expenditure and financial responsibilities.
A slight compromise on expenditure for investing is good for a better future but too much saving may disrupt your financial stability at present. It is always advised to predefine and maintain a ratio between saving and spending.
Allocation of funds in different instruments reduces risk. Successful investors are wise enough to identify the ideal proportion of allocation among different capital markets. Allocation of funds should be based on risk and return of financial instruments aligned with investment objectives.
Developing a funds allocation strategy can be challenging for beginners and assistance of a trustworthy expert can be taken. The fund allocation strategy can also be improved over time with experience in the markets.
- Understand and Manage the Risks
Risk management skills can have a major effect on your investment journey. Risk is defined as the potential losses an investor can face during unfavourable price movements of capital markets.
Most new investors often ignore the potential losses. It must be noted that every capital market carries different risk factors that can be mitigated by taking precautionary measures. Risk increases with an increase in return generating ability and is lower for conservative instruments but can never be completely eliminated.
Risk management tools like stop loss and limit order can limit the potential loss you can face. Risk in capital markets can arise through multiple reasons for each financial instrument.
An investor must be wise enough to identify, evaluate, and monitor the risk in their portfolio. The risk to reward ratio can be compared for each instrument to select the ones with better returns at the expense of a lesser risk factor.
- Look Ahead in Long Term and Stay Updated
Most of the capital markets are volatile but have historically performed well in long term. If you have invested for the long term, you should not react to intraday or short-term fluctuations in the market.
New investors often try to grab quick returns and end up making bad decisions. No one can become Aliko Dangote overnight or within a month. Investment is a long-term capital-building process that depends on time in the market rather than timing the market.
This however does not mean that you should completely ignore your investments. You must stay updated with movements in your investment portfolio at regular intervals.
- Monitor and Recalibrate Portfolio
By regular analysis of your investment portfolio, you can add or remove the instruments depending on the market conditions.
Stocks or commodities performing well currently may not always behave the same. Timely recalibration in the portfolio can assist an investor to reach their objective conveniently.
Portfolio management ability improves with experience and research of the market while keeping oneself updated with market trends.
- Passive Investors Must Invest in Safer Avenues
High-risk capital markets like cryptocurrency, equities, forex, CFDs, etc often seem to attract new investors. Although, such markets can also lead to fatal losses in the initial phase of investments.
It is always advisable for new investors to choose a safer investment avenue like pooled investment tools, bonds, low-risk schemes, etc.
New investors can track the high-risk capital markets with small amounts or through demo accounts in the initial stage. It is never a good idea to start your investment journey with the rollercoaster ride of highly volatile capital markets.