Your investment success is not going to come cheap. You will have to work for it and earn it.
Whatever you might have heard, investing is serious work that you have to be willing to get ready for it.
Not to get you worked up, think of investment as a skill. You will agree that no great skill expertise comes cheap.
This article is to help you get started with understanding core investment concepts that will help you make better investment decisions.
As the name implies, it is the first fund you use to start an investment. Your initial capital can be any amount as long as it conforms with the minimum capital requirement for the asset class you are buying.
In the capital market, different asset classes have ranges of initial capital. The starting capital for an equity investor is different from that of a fixed income inclined client.
Although, there are firms that have tried to democratize investment by reducing the initial capital for most of these asset classes.
More capital means more opportunities to invest. And the higher your returns or losses.
Cash is king! It is one catchy phrase constantly used in the investment world.
Liquidity means the cash available for use at any period.
It helps to have a strategy around liquidity management as an individual. It makes it easier for you to access new investment opportunities without selling off the previous ones untimely.
There is no definite rule for the percentage of cash you can have in your portfolio. But, savvy investment professionals have 10 – 20% cash in their portfolio.
Every asset type comes with its risk and return. Understanding how to have a balanced portfolio of assets needs a good understanding of individual risk and returns and how to combine them effectively.
Diversifying your portfolio could help you in the following ways:
- Exposure to more investment opportunities
- Reduces portfolio volatility
- Mitigates losses due to a bull run in a particular market
- Optimize your positions during market cycles
Diversification is broad, but you can always start by having a couple of assets that play different roles in your portfolio.
Simple interest, as you know, is the monetary privilege calculated on the principal lent.
In simpler terms, it is the benefit an investor derives from lending out their capital (fund) to invest.
Compound interest is the interest accrued by your interest.
It’s derived from the initial capital (principal) and the accumulated interests from previous periods. It is a faster way to grow your principal when compared to simple interest.
The more frequent the interest compounds, the better the growth rate of the principal invested.
The fundamental goal of all investors is to make money or build wealth. It is why investments are either for capital growth or steady income.
Whichever one you aligned with, return is important.
How do you measure your success with the economic situation of Nigeria?
One smart way to do this is to always think of the effect of inflation.
Inflation is the general increase in prices and fall in the purchasing value of money – Oxford Dictionary.
Your return on investment is affected by the economic condition of the country. To get the purchasing value of your return on investment, adjusting for inflation becomes key.
It could also be called the real rate of return.
These simple concepts of investing will help you get better at investing.
Understanding each of these concepts and applying them on your way to building wealth will be impactful.