Amid the global economic meltdown, ongoing geopolitical conflicts, high unemployment, rising prices of goods and services among others, one of the difficult but common questions you hear many ask is: “How do I make more money” and “What should I invest in?” My answer to nations, corporates and citizens’ question is probably not what you would expect. Practice good investment habits to make more money, even in bad economic times, and turn around the tide with these keys.
Define Your Investment Objective
Investment objective is the fundamental reason for investing. Every single investment vehicle can be categorized according to three primary objectives – safety, income and growth. The argument that an amount of money has no purpose and is just being invested for investment’s sake is quite mistaken. Usually, the situation is that the individual has yet to define the investment objective for his disposable income.
Any objective that cannot afford you even a pesewa’s loss on your invested money falls under security and will need relatively safe investment vehicles. In this case, government securities (Treasury bills, government bonds, etc.) are viable.
An individual looking to make periodic gains on his invested amount will need to look for interest paying securities. In Ghana, the most common interest paying securities return on a monthly or quarterly basis. These include money market instruments like commercial paper, certificate of deposit (CD) and banker’s acceptance. An objective of income may also mean that one may be more conscious of the yield (rate of return) than of security.
Growth naturally suggests long-term. An individual seeking growth may not be concerned with initial low yields if there is a promise of growth over time. Stocks that have a record of performing over the years may be the preferred investment option for this investment objective.
A Combination of Any
An investment objective may not strictly be one of the above but a combination of any. However, the advantages of one comes at the expense of the other. Blue chip stocks or equity mutual funds for example can be a one-stop shop for reasonable safety, income and potential for growth.
Understand and manage your investment risk
Some risks have a higher impact than others, and thus may need more attention because they may cause greater losses or gains. The risk of loss associated with the stock market is called ‘market risk’.
When inflation rises fast relatively, its impacts the purchasing power of invested assets and the investor is left with lesser monetary value. Inflation risk, also known as purchasing power risk, is the chance that the cash flows from an investment won’t be worth as much in the future because of changes in purchasing power due to inflation.
Interest Rate Risk
Interest rates could rise or fall. This is the risk that arises for bond owners from fluctuating interest rates. For example, how much interest rate risk a bond has depends on how sensitive its price is to interest rate changes in the market. The sensitivity depends on two things: the bond’s time to maturity, and the coupon rate of the bond. Unlike changes in direction of the stock market, changes in interest rates can come with some forewarning.
Time can be your friend or foe. Investors holding individual stocks for extended periods face the risk that the company they are invested in could enter a state of permanent decline or potentially go bankrupt. Even a portfolio of stocks can result in negative returns. This accounts for the risky nature of stocks even over the long-term. Though they promise greater returns the longer you hold them, they don’t get safer.
Returns on stocks are taxed when being paid out. An investment is tax-effective if you end up paying less tax than you would have paid on another investment with the same return and risk. Controlling taxes, which can be done using qualified annuities and retirement plans, enables your earnings to compound unimpeded by taxes so they can grow faster. While lower tax can help your savings accumulate more quickly, you should never base an investment decision on tax benefits alone.
Monitor your investments
Make sure you keep track of what your money is invested in and monitor your portfolio’s performance. This can help you understand and manage the risks of your investments and ensure your overall investment goals are on track. If necessary, you may need to rebalance your portfolio from time to time so it remains in line with your risk profile.
Have an Emergency Fund
Having an emergency fund is one smart way to avoid unnecessary risk of losing returns due to unexpected investment withdrawals. More so, Emergency funds make it possible to have disposable cash to take advantage of investment opportunities and to act quickly when such present themselves. Smart investors usually set aside reserve assets before they move money into riskier investments.
Beware of scams
When markets are volatile, scammers try to take advantage of investors. Investment scams can be so professional and believable that it’s hard to tell them apart from genuine investment opportunities. Some signs to look out for include delays, mistakes, over-promising and under-delivering. You may also want to check published statements, compare expected returns with similar instruments and be sure to deal with only licenced ADOs and LDMs.
Invest on margins
Margin refers to buying shares of stock or other securities with a combination of the investor’s own funds and borrowed funds. The buyer pays only a percentage of the asset’s value and borrows the rest from a bank or broker. The bought securities are used as collateral on the loan. The margin is the amount the investor puts down on the account and is typically expressed as a percentage. The Case of Buying on a 50% margin:
|PARAMETERS||WITHOUT MARGIN||ON MARGIN|
|Price of share||¢ 5.00 per share||¢ 5.00 per share|
|Amount borrowed||¢ 0.00||¢ 5,000.00|
|Amount paid by investor (personal funds)||¢ 5,000.00||¢ 5,000.00|
|Interest charge on margin||¢ 0.00||¢ 500.00|
|Minimum margin requested by broker||¢ 0.00||¢ 3000.00|
|Total Value of Shares owned||¢ 5,000.00||¢10,000.00|
|NB: 50% margin = ¢ 5,000.00
Personal funds of both investors are of same value of ¢ 5000.00
This is the lowest required equity level (money/securities) that must be held with a broker in a margin account to be able to borrow from a brokerage. When the equity value moves below the minimum maintenance, the broker may issue a margin call.
Buying on margin is advantageous in cases where the investor anticipates earning a higher rate of return on the investment than he is paying in interest on the loan. This is because buying on margin has the effect of magnifying the investor’s percentage gain or loss as compared to the percentage gain or loss the investor would have realized without borrowing.
When there is a 50% increase in stock prices
|Parameters||Without Margin||On Margin|
|Share value after increase||¢ 7,500.00||¢ 15,000.00|
|Investor’s Gain (Net)||¢ 2,500.00||¢ 4,500.00|
When there is a 50% drop in stock prices
|Parameters||Without Margin||On Margin|
|Share value after drop||¢ 2,500.00||¢ 2,500.00|
|Investor’s Loss (Net)||¢ 2,500.00||¢ 8,000.00|
An order by a brokerage for additional funds or securities to be deposited by an account holder into the margin account when the value of equity falls below the maintenance margin.
In the scenario of share price drop above, the investor must pay the broker GH¢500 to restore the maintenance margin. After paying the margin call, the investor still owes GH¢2,500 to broker. If the investor fails to pay the margin call, the securities will be sold for the broker.
As explained earlier, an investor can gain or lose big when buying on margin; this makes it necessary to seek expert advice when investing on a margin.
The writer is a financial advisory and international trade professional
You may send comments, questions or suggestions if any to [email protected] and @richmondkwamefrimpong across all social media platforms