Due to the growing rate of inflation which is 15.92%, lots of Nigerians are looking to invest their funds with the hope of creating generational wealth. Many now turn to the capital market so as to meet up with their growing demands.
However, it is unfortunate that only few people in Nigeria know the massive risks associated with Investment. Many don’t verify the counter party. A sizeable number of investors don’t take their time to familiarize themselves with the nitty-gritty and what it takes.
This has led to the rise in scams which target growing sector of general public out of their money. Here are some common mistakes which you should avoid.
Dealing with an Unregulated Broker
Stock investing is regulated in Nigeria by the Security and Exchange Commission (SEC), while retail forex trading is not regulated.
Dealing with an unregistered stockbroker makes you highly vulnerable to scams and you may lose all your money quickly. That’s why before making a move, you should check the SEC website at www.sec.gov.ng to confirm that the stockbroker is actually licensed. Apart from its credibility, ensure to find out about its profile and records.
Before dealing in any investment in the forex market, you should note that there are lots of scam forex brokers.
Stephen from Forex Beginner Nigeria warns “There are no regulated forex brokers in Nigeria. It is always advisable to invest via forex brokers licensed by your home country’s regulator as this means your capital is safe. But in the absence of local regulation for retail online FX Trading, traders are trading via risky counter parties at their own risk”.
The SEC has discouraged retail forex trading, so it’s better to abstain from it for the safety of your funds. Some investors don’t bother to do some background checking before patronizing a forex broker.
Not diversifying your investment
Failure to diversify is one of the major blunders being made by Investors, and this greatly affects their portfolio.
Note that diversification is when you put your funds out among many investing instruments. Doing this goes a long way in reducing your risk exposure.
If you invest all your funds in just one stock and the company goes bankrupt, it means you have lost everything. However, if you spread your money across stocks of different companies operating in different sectors like Agriculture, FMCG, finance etc., the chances of all the companies folding up at once is next to zero, and your investment is protected.
When one stock is doing badly, the other ones will compensate and that is the idea. Investment experts recommend new investors to invest in ETFs listed on the NGX as they contain stock of different companies in one basket, and are very diverse.
Not carrying out proper analysis
Some investors still use the approach of herd mentality. These are the types of investors who totally make their investing decisions based on other people’s opinions. They don’t take time to make their independent research about the Investment they want to go into.
While it is not bad to seek advice, most especially from experts in that particular field, you should also do your own analysis.
As an investor you are supposed to carry out a fundamental analysis of a company before buying its stock. This analysis will involve you studying its balance sheet, income and cash flow statements to help you come up with useful ratios such as price to earnings ratio (PE ratio).
PE ratio tells you by how much a stock is overpriced and this shows investor confidence in the stock. It also tells you how long you have to wait to recoup your investment in the company, if earnings remain the same.
Not having a plan
A popular adage says he who fails to plan, plans to fail. Not having a plan or goal before doing something is like just moving without a destination.
Some investors make the mistake of not drawing up a plan before investing. You need to sit down and do some self-evaluation and consider the following things before you invest:
- Your reason for investment- It could be retirement, buying a home etc.
- Your present age how much time do you have to achieve your goal.
- How you hope to fund the Investment- It could be via salary or otherwise
After you have considered these things, you can then tailor your plan to fit your investment objectives. Your hard-earned money is involved here, so don’t make the mistake of allocating more time planning your vacation than planning a business to secure your financial future.
Don’t base your investment plan on tales, future expectations of the market going up, hot tips and stories from colleagues.
Buying Penny stocks
Penny stocks are stock of small companies and are usually very cheap hence their name.
Some of these penny stocks are issued in the primary market after Initial Public Offers (IPOs) and refuse to grow in value. They remain the way they are and even fall in price, hence becoming cheaper.
When you look at stock listed on the Nigerian stock Exchange (NGX), you see some stocks with prices of N0.36, N0.2 etc. these are penny stocks. Companies with penny stock may be poorly managed, hence the lack of growth, or may not be adequately capitalized.
The risk is that these stocks have low liquidity, hence they are difficult to sell if you want to dispose of them. They are also fertile ground for pump and dump fraudsters.
Most importantly, in most cases, penny stock does not pay any dividend so the risk of holding them outweighs the rewards.
Failure to manage risk
A sizeable number of Investors have encountered catastrophic losses due to the inability to properly manage risks. Managing risk is your ability to identify, analyze and control negative factors that pose threats to the success of your investment.
These risks could be market risk, regulatory risk, industry risk etc. Having cash in a backup emergency account is part of risk management because if there’s an emergency you don’t need to sell your stock.
You also need to rebalance your portfolio periodically to ensure all your stocks don’t have a positive correlation. You have to keep abreast of industry news and events so that when a company is running into serious problems you can sell your stock immediately and not end up as a bag holder.
An overconfident investor mistakes past performance as an indicator of future results. Just because you got it right in the past doesn’t mean you should throw caution to the wind and not do your homework before investing.
Investors should note that when it comes to investing, having too much confidence is not necessarily a good thing; thus, it should be avoided. Approach every new investment soberly and with caution. In the capital market, nothing is guaranteed as prices change without notice.
Being a bag holder
This name defines an investor who stubbornly holds on to a position in a security that is performing poorly. Those caliber of investors hold a poor position, with the belief that it will get better.
As time goes on, the security which has lost some value could become completely worthless if the underlying operations of a company are poor with no improvement.
Hanging on to a poorly performing stock, despite the negative sequence of activities & underperformance by the company may spell doom for your investment plan. You could end up holding a bag with nothing in it.
Learn & don’t be afraid to make mistakes
Mistakes are common in the course of Investing as even experienced investors make mistakes. Despite the fact that they are not totally avoidable, taking note of them can go a long way in helping you make right Investment decisions that would increase your profits and curb losses.
In order to be a successful investor, you need to devote your time and energy to get intensive education and engage in considerable research. You should endeavor to keep yourself updated periodically on latest Investment news, read lots of relevant and current articles
Don’t let your past investing errors affect you, learn from them and brighten the chance of your subsequent Investments.