Risks come with every investment, but investing cautiously and sensibly is not a gamble, it is a calculated effort that requires knowledge. In this article, we’ll simplify the process of how to invest money as a student in Nigeria.
While investing is a great avenue for creating long-term wealth, it is also known to be quite risky as well. If you want to know what to invest in as a Nigerian student, we’ve come up with all you need to know before you invest your money and also a list of investment options you can try out.
Table of contents
How To Plan Before Investing As A Student In Nigeria
Here are a few things to do before investing in shares or any other form of investment as a student in Nigeria:
1. Look at your debt
Before starting to invest as a student, you must check the debt your account holds or if you have some money borrowed, which is a liability now. With this method, you will know how much money you must invest.
2. Fix your monthly expenses
Starting early and investing as a seasoned investor requires a financial strategy and dedication. The first step is to always create a budget for yourself and your costs, including student housing as an international student. When you have it ready, we will proceed to the next step.
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3. Always factor in the miscellaneous expenses
Miscellaneous expenditure includes anything and everything under the sun, i.e., emergency health issues, buying extra academic books, and household requirements, among many others.
4. Segregation of Funds
As a Nigerian student who wants to start investing, you must have a financial vision alongside the knowledge of investment and bifurcate various out-of-the-line expenses, including travel, dates, and others. As soon as your monthly funds come in from various sources like your monthly allowance, part-time jobs, or student internships, calculate your expenses to allocate the funds correctly.
Here is the list you may follow:
- Shopping
- Travel Expenses
- Eating Out
- Medical Emergency
- Ticket Budget for holidays
- Night Outs
- Birthday Gifts or other
- School-related expenses
5. Decide what your goals are
Setting aside money in your student bank account is a wonderful start, but it’s important to set goals before investing. Consider your short- and long-term goals, since your investment strategy will impact those plans.
Short-term savings objectives typically include any expenses that must be paid within the next one to five years. Because the period is short, you don’t want to put your money into anything risky. The last thing you want is for your investments to fall in value just when you need the money.
Admittedly, student investors should concentrate on their short-term savings objectives. However, recognizing what is important to you for your long-term ambitions might help you budget.
Since long-term investments usually have a time frame of five years or more, you can afford to take more risks with your investments. That’s because you’ll have time to recover if there’s ever a market drop.
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What To Invest In As A Student In Nigeria
Here are a few investment options Nigerian students can take advantage of.
1. Commercial papers
Commercial papers are short-term debt instruments issued by corporations to raise operational capital, with a maximum tenor of 270 days and a fixed interest rate known as the discount rate.
These papers are attractive investment options, often yielding higher interest rates compared to CBN-issued treasury bills. Additionally, they have short maturity periods and are typically issued by credit-worthy Nigerian companies, confirming their credibility.
According to Nairametrics, in 2023, MTN Nigeria raised about N375 billion through seven issuances of commercial papers, with interest rates ranging from 10.41% to 14.33%. Dangote Cement also raised N221 billion through commercial papers in different issuances whose interest rates ranged between 9.31% and 12.70%.
2. Nigerian Treasury Bills
Nigerian Treasury Bills (NT-Bills) is a short-term debt instrument issued by the Central Bank of Nigeria (CBN) on behalf of the Federal Government, featuring 3-month, 6-month, and 12-month maturity rates.
Serving dual roles, these bills act as instruments for the Federal Government to finance budget deficits and as a monetary policy tool by the CBN to regulate inflationary pressures.
NT-bills are offered through biweekly primary market auctions on Wednesdays, with a minimum investment of N50,001,000. Following the auction, the bills enter the secondary market on FMDQ, operational Monday to Friday (10 am-4 pm).
Interest rates, determined at the auction based on received bids are dependent on the range of bids received by the CBN. For example, the range of bids on the 91-day bills during the last set of NT-Bills auctions in 2023 was between 3.3% and 17.01%.
This is a risk-free investment and a good option for college students.
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3. FGN Saving Bonds
FGN Saving Bonds are short-term bonds issued by the Federal Government every month through the Debt Management Office. These bonds are backed by the full faith and credit of the Federal Government of Nigeria. Unlike T-bills and regular FGN bonds, FGN Saving Bonds are channeled towards smaller investors.
FGN Saving bonds have a maturity period of 2 years and 3 years, and coupon payments are made quarterly (i.e. four times a year).
FGN Saving Bonds typically receive less attention than FGN Bonds and NT-bills because they have relatively lower effective yields than other FGN-backed bonds.
For example, the 2-year FGN Savings Bonds issued in December 2023 had an effective yield of 12.464%. While the 364-day NT-bills issued on December 27 had an effective yield of 12.5%.
They are more open to smaller investors as subscriptions as the minimum subscription amount is N5000, while the maximum subscription amount is N50,000,000.
4. Money market Mutual Funds
Money Market Funds are low-risk, short-term investments managed by asset management firms and regulated by the Securities and Exchange Commission (SEC).
These funds primarily invest in low-risk money market products such as treasury bills, commercial paper, and bank deposits, resulting in a low-risk profile.
According to current laws, no instrument within a money market fund is expected to have a maturity date greater than 364 days, with the funds themselves often maturing within 90 days.
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6. Fixed Deposits
As a Nigerian student looking to invest, you can simply put your money in a fixed deposit account. Fixed deposits offer better interest rates than ordinary deposits. With a minimum investment of 5,000 naira, you can choose any bank for at least 30 days. Note: varying banks offer radically varying interest rates, so you must research this information before investing.
7. Stocks
Individual stocks are appealing because they allow you to acquire a portion of a firm. When a firm does well, its stock price rises. However, if the company fails to meet expectations, its market value may decline. In other words, while stocks can provide a large return, they can also result in a loss. Long-term investors might consider investing in equities, but diversifying their portfolios is always advisable.
Although learning about how to trade stocks can be simple, it’s important to understand what makes stock prices go up and down, so you can make informed investing decisions.
Now most Nigerian banks are in your faces with shares for sale, here are a few things you need to know.
According to Punch Newspapers, the Nigerian banking sector has recently become a focal point for investment, largely due to a new directive issued by the Central Bank of Nigeria, mandating an increase in the minimum capital base for banks.
As a result, 26 banks are actively engaged in the capital markets and other investment platforms, seeking to raise funds to strengthen their financial stability and resilience. This initiative is designed to bolster the sector’s ability to support economic growth, enhance its robustness against financial shocks, and ultimately contribute to a more stable and dynamic economic environment.
Before using your savings or pocket money to buy shares in a bank, you need to carefully evaluate all options and take the time to make a well-informed decision before investing.
Here are the various indices and metrics you should consider before making any investment decisions:
1. CaR ratio
The capital adequacy ratio (CAR) is a measure of how much capital a bank has available. This includes assessing the banks’ capital adequacy ratios, which evaluate the bank’s capital relative to its risk-weighted assets. A higher capital adequacy ratio signifies a stronger capacity to absorb potential losses, indicating a more stable and secure investment.
How do I find out a bank’s CaR ratio?
The capital adequacy ratio is calculated by dividing a bank’s capital by its risk-weighted assets.
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2. Assets
Asset quality is one of the most critical areas in determining the overall condition of a bank. The primary factor affecting overall asset quality is the quality of the loan portfolio and the credit administration program. Loans typically comprise a majority of a bank’s assets and carry the greatest amount of risk to their capital. Securities may also comprise a large portion of the assets and also contain significant risks. Other items that can impact asset quality are other real estate, other assets, off-balance sheet items, and, to a lesser extent, cash and due from accounts, premises, and fixed assets.
3. Return on equity
Each bank’s profitability metrics, such as return on equity and return on assets, provide insights into the bank’s operational efficiency and profitability. Similarly, analyze the bank’s dividend policies. Changes in dividend payouts can indicate the bank’s financial health and its ability to generate cash flow.
Students who want to invest in bank shares can use ROE to estimate a stock’s growth rate and the growth rate of its dividends. These two calculations are functions of each other and can be used to make an easier comparison between similar companies.
To estimate a bank’s future growth rate, multiply the ROE by the company’s retention ratio. The retention ratio is the percentage of net income that is retained or reinvested by the company to fund future growth.
4. Funding sources
Other important indices to consider include funding sources, as a diversified and stable funding base can help mitigate risks associated with market volatility. Additionally, evaluating management quality is crucial, as strong leadership can drive a bank’s performance and strategic direction.
Investors should also assess the bank’s market position and competitive advantages; banks with robust market positions are generally better equipped to attract both capital and customers, enhancing their overall stability and growth potential.
One mistake to avoid is investing in banks that are likely to be involved in mergers and acquisitions. While these operations can lead to synergies and increased market presence, they may also present uncertainties and risks that harm investment returns. Before making an investment decision, evaluate the potential effects of such strategic movements on the bank’s performance and general stability.
1. Don’t take your eyes off economic data
Before deciding to invest as a student or buy any bank shares, it is important to monitor the broader economic environment, such as interest rates, inflation, and economic growth, as these factors can greatly affect the performance of the banking sector during recapitalization.
2. Don’t overlook the status
It is better to invest in tier-one banks because they are considered more stable and less likely to experience sudden, adverse events. For a bank to remain top-tier for a long time, they have shown competence over the years. Investors can see that these banks have consistently performed well by examining their track records. These factors can help investors choose shares from such banks based on their solid performance history.
3. Chasing the trend
A lot of investors make the mistake of chasing trends or what’s cool because of FOMO (fear of missing out). Before investing, always do your due diligence before putting your money in the market. Additionally, you can invest passively in the markets through index funds and watch your portfolio grow over time. By using your brokerage account to buy diversified mutual and index funds, you take on less risk than when you buy an individual company’s stock.
This is one of the common mistakes students who are looking to invest make. Don’t take investment advice from those who don’t know your financial situation. For example, you may feel pressured by someone on social media to start investing in a certain company, but they aren’t clued into what other investment options you may have.
Make sure to do your research when investing and read up on the person giving financial advice on TikTok or another social media platform.
5. Not giving your investments time to grow
When it comes to investing, timing is critical. To optimize your earnings, you should invest for as long as possible. “Investment is something you do with the expectation of reasonable long-term returns.
Expecting a portfolio to do anything other than what it was intended to accomplish is a recipe for catastrophe. This means you must maintain reasonable expectations about the timing for portfolio growth and returns.
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6. Investing money you’ll soon need
Don’t invest money you’ll soon need. Don’t invest your school fees. Don’t invest your pocket money. Don’t invest the money meant for your textbooks. Before investing as a college student, you need to understand your financials and have control over your money and budget.
A good way to know if you’re ready to invest is to understand if you have a healthy amount of cash in a savings account set aside for all your near-term goals. Harrison, a financial expert suggests that money needed within a relatively short period, such as within three years, should not be invested in stocks.
7. Falling in Love With a Company
Too often, we hear people say, come and invest in Bank A, it is my bank, or Come and invest in Company B, it is my father’s company. This is a wrong way to decide which company shares to buy, your decision should be purely data-driven and not based on emotions or how you feel about the company.
Always remember, you bought this stock to make money. If any of the fundamentals that prompted you to buy into the company change, consider selling the stock.
Profits from the selling of shares are not subject to capital gains tax in Nigeria. Dividend income, on the other hand, is subject to withholding tax, which is withheld automatically before receipt.
Yes, Nigerian students can legally buy shares. There is no age restriction as long as you have the necessary documents and funds. However, if you are under 18, you may need a parent or guardian to assist with the process.
You’ll need a valid ID (such as a National ID card, Driver’s License, or Passport), a utility bill for address verification, and a Bank Verification Number (BVN). Additionally, you will need to open a Central Securities Clearing System (CSCS) account through a stockbroker.
Yes, you can buy shares online through various stock trading platforms and apps available in Nigeria. Many stockbrokers offer online services that make it convenient to buy, sell, and manage your investments from your phone or computer.
Before buying shares, consider the company’s financial health, industry trends, market conditions, and investment goals. It’s also important to diversify your investments to reduce risk.
Conclusion
Investing is a marathon, not a sprint. Do not expect to be rolling dough overnight. But with a little discipline and a dash of Nigerian hustle, you’ll be well on your way to financial independence.
References
- nairametrics.com – Top 10 short-term investment options for Nigerians in 2024
- investopedia.com – 8 Common Investing Mistakes to Avoid
- nerdwallet.com – How Do Stocks Work?
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