In line with the sustainable development SDG goal number one ‘End Poverty’, this study tends to give the
general public an overview on financial investment (Bonds, Stocks and Shares) which can help them in
earning more income to enable them tackle poverty. It is in human nature to plan for the rainy days. An
individual must plan and keep aside some amount of money for any unavoidable circumstance which might
arise in days to come. Future is uncertain and one must invest wisely to avoid financial crisis at any point
in time.
©Betasha Felix Chawaza 2018
©Betasha Felix Chawaza 2018 001
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Introduction
Every individual needs to put some part of his
income into something which would profit him in
the long run. Investment is essential as unavoidable
circumstances can arise anytime and anywhere. One
needs to invest money into something which would
assure maximum returns with minimum risk in the
future. Money saved now will help you overcome
rough times in the best possible way (Investopedia, 2013). Historical background
Financial investment is an investment enhanced
by the capitalism economic system. Capitalism is a
social economic system where capital assets are
merely owned and controlled by private persons, where labor is purchased for money wages, capital
gain accrue to private owners, and price mechanism
is utilized to allow capital goods between uses. Capitalism emerged after the failure of the feudal
system in the 14th century and reached a high, l
evel
of development during the industrial revolution, which began in Britain in 1688. The industrial
revolution brought about large-scale machine
production, which was based on hydroelectric
power and the wide application of science to the
process of production. Capitalism began with the Laissez-faire system, which means free competition or leave things alone. The philosophy underpinning Capitalism was that
the less a government interfered in an economy the
better for the country. But towards the end of 19th
century, there was a bitter struggle for supremacy
between capitalist and socialist states led by the
USA and the former Soviet Union respectively.
The
war of words between the two groups is often called
the cold war. Eventually, socialism collapsed in the
east Europe states in the early 1990s and today
Capitalism seems to be gaining the upper hand. It is
spreading like wild fire to all parts of the world
including Nigeria but it may not be more than a
pyrrhic victory (Bulus, 2007). Aim
The aim of this study is to give an insight to
general public on what financial investment is. This
study focuses on bonds, stocks and shares. Objectives
Following the objectives are:
Enlighten the general public on the
distinctions between bonds, stocks and
shares. Identify the type of financial investment that
is safer between bonds, stocks and shares. Explain how federal government of Nigeria
issues bonds to individuals. Identify the various types of bonds, stock
and share and highlight the content of a
bond certificate.
Financial investment
Financial investment refers to putting aside a
fixed amount of money and expecting some kind of
gain out of it within a stipulated time frame. There
are various types of financial investments. Financial market
A market is a situation that brings buyers and
sellers into close contact for the purpose of
transaction. Properties, stocks and shares, bonds, fixed deposit
necessity various investment market such as
property market, capital market, money market, forex market, commodity market, and others. Financial market is a market that supports the
trading of financial investment (Ric, 1996). FIG.1. Source:
https://goo.gl/images/aLDcBw
Bonds
Government or an Organization might want to
rise capital and the easiest way to rise capital is
through issuance of bonds. This can be done by
printing and selling of certificates. It works like
this;
when you invest in Bonds, you are a lender
in the sense that you borrowed your money to
the issuer for interest for a particular period of
time more than a year. Bonds are also known as
income or debts. In Bonds investments, whether
the issuer makes loses or profits, as long as they
stay in the business, you will receive a specific
©Betasha Felix Chawaza 2018 ©Betasha Felix Chawaza 2018 001
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rate of interest and you will get your money
back at a predefined date called “maturity date”. Maturity date refers to the final date for the
payment of any financial product when the
principal along with the interest needs to be paid
to the investor by the issuer. If the issuer goes
broke, you will be ranked very high on the list
of creditors in the bankruptcy court.
Therefore
in Bonds investment the risk is minimal because
the payment of your capital is certain alongside
the interest. Treasury bills is an example of a
Bond. Investor in bond receives interest called
coupon at regular bases and their initial
investment is repaid at a specific date agreed
(Ric, 1996). Federal Government of Nigeria Bonds (FGN
Bonds)
FGN Bonds are debt liabilities of the Federal
Government of Nigeria (FGN) issued by the
Debt Management Office (DMO) on behalf of
the Federal Government. The FGN has a
compulsion to pay the bondholder the principal
and agreed interest as and when due. When you
buy FGN Bonds, you are lending to the FGN for
a specific time frame. The Bonds are considered
as the safest of all investments in domestic debt
market because it is backed by the ‘full faith and
credit’ of the Federal Government,
and as such
it is hush-hush as a risk free debt instrument. They have no default risk, meaning that it is
undeniably certain your interest and principal
will be paid as and when due. The interest
income earned from the securities are tax free
(DMO., 2018)
Types of Bonds
Following are the types of bonds according to
Management study guide, (2018):
i. Fixed Rate Bonds
In Fixed Rate Bonds, the interest
remains throughout the tenure of the
bond. Owing to a constant interest rate, fixed rate bonds are resistant to chances
and fluctuations in the market. ii. Floating Rate Bonds
Floating rate bonds have a fluctuating
interest rate as per the current market
reference rate
iii. Zero Interest Rate Bonds
Zero interest rate bonds do not pay any
regular interest to the investors. In such
types of bonds, issuers only pay the
principal amount to the bond holders. iv. Inflation Linked Bonds
Bonds linked to inflation are called
inflation linked bonds.
The interest rate
of inflation linked bonds is generally
lower than fixed rate bonds. v. Perpetual Bonds
Bonds with no maturity dates are called
perpetual bonds. Holders of perpetual
bonds enjoy interest throughout. vi. Subordinated Bonds
Bonds which are given less priority as
compared to other bonds of the
company in cases of a close down are
called subordinated bonds. In cases of
liquidation, subordinated bonds are
given less importance as compared to
senior bonds which are paid first. vii. Bearer Bonds
Bearer Bonds do not carry the name of
the bond holder and anyone who
possesses the bond certificate can claim
the amount. If the bond certificate gets
stolen or misplaced by the bond holder, anyone else with the paper can claim
the bond amount. viii. War Bonds
War Bonds are issued by any
government to raise funds in cases of
war. ix. Serial Bonds
Bonds maturing over a period of time in
installments are called serial bonds
x. Climate Bonds
Climate Bonds are issued by any
government to raise funds when the
country concerned faces any adverse
changes in climatic conditions. Importance of bonds to the Nigerian
Government
Debt management office (2018), stated the
importance of bonds to the Nigerian
Government which are to
: • Enhance government fiscal deceits in a noninflationary and sustainable manner. • Enhance fiscal discipline of the Government. • Refinance maturing debt obligations of the
Federal Government.
©Betasha Felix Chawaza 2018 ©Betasha Felix Chawaza 2018 001
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• Establish benchmark yield curve, this serves as
reference for pricing bonds issued by other
bodies, especially the private sector issuers. • Develop and ensure liquidity in the domestic
bond market on a sustainable basis. • Enhance and deepen the savings and
investment opportunities of the populace. • Sustain the development of other segments of
the Bond market. • Diversify government financing sources. Contents of a Bond Certificate
All the details about a particular bond are
included on the Bond’s certificate: The value of the Bond which is known
as the face value The interest rate How often the interest is paid
Who issued the bond
The maturity date
Stocks and Shares
A stock is a general term used to describe the
ownership certificates of any company. A share
is an indivisible unit of capital expressing the
ownership relationship between the company and
the shareholder. Shares are issued by companies
in smaller units. A dividend is usually paid each
year in respect of shares, this vary according to
the company or firm. The shares of a company
depends on the activities of that company; the
more a company prosper the more its shares. Holding a particular company's share makes you
a shareholder. Stocks are of two types; common and preferred. The difference is while the holder of the former
has voting rights that can be exercised in
corporate decisions, the later doesn't.
However, preferred shareholders are legally entitled to
receive a certain level of dividend payments
before any dividends can be issued to other
shareholders (Investopedia, 2013). Types of Shares Equity shares Preference shares Bonus shares Right shares Employees’ stock option plans and sweat
equity shares (Bennett, et al., ND).
Stocks and Bonds distinctions
Bonds vs. Stocks
Yes Must pay Interest No
Yes Capital must be repaid No
No Must give up control Yes
(Ric, 1996)
Conclusion
Unlike property investment which involves large
capital outlay to acquire, financial investment are
more cheaper option than property investment
because in property investment there is stipulated
routine cost for maintenance and income is
gotten from the rent paid by the tenants. In Bonds, you have little to worry about since whether the
issuer makes profit or not you will still get your
money back. In stock, you hold part of the
company asset which when there is default of
payment you will be given possession of the
company while in shares,
a shareholder can’t do
as he wished with the company’s asset, when
there is bankruptcy the shareholder losses
everything. In conclusion, in financial investment, grossly in stocks and bonds there are minimum
risks compared to other forms of investments
which when not insured it is exposed to greater
risk.
©Betasha Felix Chawaza 2018 ©Betasha Felix Chawaza 2018 001
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References
Bennett, Coleman & Co, (ND). “Types of
Stocks” Retrieve 11 November 2018. https://m.economictimes.com/definition/stocks. Bulus, B. G., (2007). “Capitalism: Concept of
Capitalism and Historical development of
Capitalism”. Political Economy. P.14-16. ISBN
978-978-48070-4-3. Debt management office, (2018) “FGN Bonds:
importance of bonds” Retrieved 23 October
2018:https://www.dmo.gov.ng. FIG.1.“Capital Market”.https://goo.gl/image
S/aLDcBw. Investopedia, (2013). “Shares” Retrieved 05
November,2018.https://www.investopedia.com. Management study guide, (2018). “Bonds: types
of bonds” Retrieved 22 October 2018:
https://www.managementstudyguide.com. Management study guide, (2018). “Financial
Investment“Retrieved22October2018:http://www. managementstudyguide.com. Ric E., (1996). “Understanding the Capital
market: Bond Certificate. The Truth about Money. p. 47-91. ISBN 0-87840-616-6.
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