Types Of Capital Market Instruments

Types Of Capital Market Instruments

A. Stocks

A stock or share is a unit of capital of a company. It is how much someone’s investment is worth in a company. For Instance, if you buy XYZ Company shares worth 50,000, it means you are a part owner of XYZ Company to the tune of A450,000. That is, your worth in XYZ Company is A50,000. Stocks have three benefits which make them more profitable than most investments.

I. Price or Capital Appreciation

In this case, if at the time you bought a particular stock the price is N10, the price could increase to N12 after some time. In this sense, the price has appreciated. It could even increase to N20, which is 100% on your initial investment. At this point, you could sell it off and walk away with 100% increase on your investment, or you could leave it altogether or sell part of it to recover your initial investment.

II. Scrip Issues/Bonus Shares

Many companies at the end of a profitable year try to reward their shareholders. Some of them declare bonus shares. This means, additional shares are added to the existing portfolio of a shareholder. It could be one new share for two existing ones or one for one, or one for three etc. This also increases the size of a shareholder’s portfolio.

III. Dividend/ Interest Payout

Here, companies after a financial year set aside a portion of their profits, which is approved by the Board of Directors but subject to acceptance at the AGM of such an organization. This sometimes may look very little but for large investors, some dividend payouts alone run into millions of naira. Now by the time you add up these three benefits, you’ll discover that investing in the stockĀ  market is worth the risk, time and resources, because in the end theĀ  Investor stands to benefit more.

B. Mutual Funds

Mutual funds or unit trusts are funds created by investment houses like stockbroking firms, finance houses etc. where they pool investors’ funds together and invest these on their behalf in different outlets (i.e. manufacturing, oil & gas, telecommunications, real estate etc). They pay investors fixed amount of returns on their funds. We have different types of mutual funds. Some are on property; most are on company stocks etc. The fund manager/administrator, i.e. the company in charge of this fund, bears the risk on the investment.

This is not the case with the capital market where it is the investor/shareholder that directly shoulders the risk on investment. However, mutual funds are another reliable way to grow one’s funds while leaving the risks in the hands of the Fund Manager.

C. Government Bonds

A government bond is a certificate promising repayment of debt. This certificate is issued by the government or a company promising to pay back borrowed money at a fixed rate of interest on a specified date. Recently, the Cross River State Governor, Mr. Donald Duke (i.e. in 2004), went to the Nigerian Stock Exchange to raise money for the state government through the sale of bonds which was to be used to fund the development of tourism in the state, especially with regards to the development of the Obudu Ranch Resort, in Obudu, Cross River State.

You need not bother yourself about these different investments. Just start from somewhere to create your own investment portfolio. The earlier you start, the better and easier it will be for you to build wealth.

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