Investing can be simple or complex—it all depends on what you know, the knowledge you’ve gathered, and the strategies you’ve put in place to manage it. Does that sound challenging?
Think of your life experiences. When you reflect on things you’ve done and how you handled them, you’ll notice that many issues can be managed or resolved when you understand the basics.
You’ll be surprised at how knowing the fundamentals helps you make better decisions and perform well in any area you focus on. With that in mind, let’s explore a few basic investment terms:
1. Risk
In simple terms, risk is the possibility of something unfavorable happening. In investing, it’s the chance that your actual returns may be lower than expected, or that you could lose some or all of your invested capital.
There are different types of investment risks, including:
o Market Risk: Losses due to changes in the overall financial market.
o Credit Risk: The risk that a bond issuer might default, affecting fixed-income investments.
o Liquidity Risk: The risk of not being able to sell an investment quickly without reducing its price.
o Inflation Risk: The risk that inflation will decrease the purchasing power of your returns.
2. Risk Tolerance
Everyone has a certain level of risk they’re comfortable with. This is called risk tolerance, which is influenced by factors such as age, financial situation, time horizon, and emotional temperament.
3. Return
Return is the profit you earn on your investment, commonly referred to as ROI. Returns can come from an increase in the asset’s value over time, dividends from a company’s profits, or interest from bonds or savings accounts.
4. Diversification
Think of how you spread your money across various expenses. Diversification works similarly in investing, where you spread your investments across different asset classes (stocks, bonds, real estate) and securities (companies, industries, regions) to minimize the impact of any one investment’s poor performance on your overall portfolio.
In other words, “Don’t put all your eggs in one basket.”
5. Time Horizon
Time horizon refers to how long you expect to hold an investment before needing to access the funds. It’s an essential factor in determining your risk level. The longer your time horizon, the more risk you can take, as you’ll have time to recover from market fluctuations.
6. Compound Interest
Compound interest is when your investment grows over time as your earnings generate their own earnings. This concept applies to both interest on savings and capital gains from investments.
For example, if you invest #10,000 at a 7% annual return, in 10 years, your investment will be worth approximately ₦19,671—nearly doubling your money, even without adding extra funds.
7. Inflation
You might have heard of inflation, but not everyone fully understands it. Inflation refers to the increase in prices over time, reducing the purchasing power of money.
For instance, if you run a lemonade stand and charge one naira per cup, but during the dry season, demand surges, and you raise the price to two naira. Although people are willing to pay more, their earnings haven’t necessarily increased—this is inflation.
By understanding these fundamental concepts, you can make informed decisions and build a more resilient investment portfolio. If you need assistance with investments, credit, or asset management services, contact our customer service at (+234) 812-3778-399.