HOW TO MAKE
MONEY IN THE MONEY MARKET
WHAT IS MONEY MARKET?
Money
markets simply put are those markets where debts and other securities are
traded in exchange for profit (Buyer) and Liquidity or cash (Seller). If you
are not familiar with accounting, economics or any business language, you have
nothing to worry about.
I
have made this report reader friendly by trying as much as possible where
necessary to break down any jargon that might make this write up unfriendly
(smiles).
WHERE IS THE MARKET LOCATED?
The market is located in financial,
debt, capital, money, fund, discount houses, investment management houses and
banks without exception of the apex banks (e.g. Central Banks of Nigeria). This
group of people makes up the seller and brokers while corporate organizations
and individuals make up the buyers. However, roles could be switched depending
on the investment type.
WHAT ARE THE INVESTMENT OPTIONS?
-
Nigeria Treasury
Bills (NTB)
-
Commercial Papers
(CP)
-
Bankers
Acceptance (BA)
-
Certificate of
Deposit (CoD)
-
Bonds
-
Call Deposit (CD)
-
Commercial Papers
(CP)
Nigeria Treasury Bills (NTB)
Nigeria
Treasury Bills (NTB) is a government way of borrowing money from the public to
increase the amount of cash available in the government pause or treasury. It
is a government backed or guaranteed debt usually issued by the Apex bank/CBN.
This is to say you are lending to the federal government. By guaranteed or
backed, means the federal government must make payment to investors at an
agreed time.
The
payback or maturity period includes; 91 days, 182 days and 364 days
respectively. Individuals like you and I, corporate organizations, fund
managers and investment boutiques can invest in NTB.
One
of the advantages of NTB is that it can be used as collateral for loan and
other credit facilities and it withholding tax on it is not charged compared to
other investment types. Also interest on it can be paid at any time it is
realized upfront at the request of the investor. Another benefit is the fact
that it is a low risk investment with high liquidity. You have little to worry
on investment loss of value with changing economy as this is also lower.
To
invest in treasury bills, visit your bank to get a quote of the available
treasury bills which could be as low as ₦50,000.
Commercial Papers (CP)
Commercial
papers are unsecured promissory note by an issuer (Corporate body) to the
lender (Investor) which states that the issuer will pay the investor a higher
amount than was borrowed from the investor at a particular time using a defined
interest rate. This is a service offered and arranged by most banks along with
overdraft so that corporate bodies that need to borrow more money publicly can
do so.
However,
CP unlike NTB is not backed or guaranteed by the bank as it is a direct indebtedness
the issuer to the investor. So what is the advantage of bearing this much of an
investment risk; CP unlike other investment has a very high interest rate that
is dependent on the desperation, credit rating and volume of cash needed by the
issuer. Investment maturity period
ranges from 31 days, 91 days and 364 days respectively.
CP
is usually offered at a discount whereby if ₦5,000,000 is issued at 30%
interest rate for 364 days, you as an investor are expected to pay ₦3,500,000.
CP
carries no withholding tax on interest. However, consider the credit worthiness
and capacity to pay of the issuer before investing in a CP.
Bankers Acceptance (BA)
Bankers Acceptance (BA) is usually a
short time investment that allows investors to buy into bank draft issued by a
corporate body specifying on such that the bank should pay the investor at a
particular time the full sum stated on the draft. Unlike commercial paper (CP),
BA is guaranteed by the bank even when the issuer or corporate body seems
unable to pay. Therefore, this is more secure and less risky when compared to
CP. However, it usually carries a lower interest rate when compared to CP but
higher when compared to NTB.
Investment/Maturity period ranges from 31 days, 91 days, 182 days and
364 days respectively.
BA just like CP is usually paid for by
the investor at a discount while he receives the full value on the maturity of
the security.
However, it is more secure when
compared to CP and accumulated interest can be received before the maturity of
the security/investment.
Certificate
of Deposit (CoD)
Certificate of deposit (CoD) simply
put is an investment/security issued by the investor as a loan to the bank at
an agreed interest rate. Interest and principal is only paid at full maturity
and cannot be withdrawn before the maturity. However, if there’s need to
withdraw investment before its maturity, then the investor will have to pay a
penalty fee on the accrued interest.
Maturity period varies from 30, 60,
90, 120, 180 and 365 days. Interest at maturity is subjective to 10%
withholding tax.
Bonds
Bonds are securities that are similar
to an IOU or indebtedness issued by government or corporation to raise capital
to finance its operations. In return for the bond, the issuer agrees to pay the
investor interest accrued over the life of the investment. The principal is
paid at maturity of the investment. The bond is usually a long time investment
and enables the issuer to make finance long time project. There are different
types of bonds based on the issuer; corporate bond is usually issued by private
and public companies. Municipal and government bonds are issued by both federal
and local governments respectively. Municipal bond is exempted from federal and
local taxes. Foreign bonds are issued by corporate bodies outside the country
in which it operates, while Asset backed bond is a bond backed by a pool of
asset.
Bond is a low risk dependable form of investment.
Investors include finance houses, pension funds, corporate bodies and high/low
net worth individuals.
Maturity date is the date the issuer
is expected to pay up the nominal amount that is the amount invested by the
investor. This period ranges from;
·
Short term – 5 years
·
Medium term – 5 to
12 years
·
Long term – 12 years
Interest rate could vary from;
·
Fixed rate which
is a payable at a regular interval on the basis of the investment agreement.
·
Floating interest
rate which is tied to some economic indicators or factors such as inflation and
money market movement. The Nigeria Federal government bond is adjusted based on
Minimum Rediscounted Rate (MRR)
·
Zero discount
rate has no interest paid out. However, it is usually sold at a discount while
the face value is paid in full at maturity along with all accrued interest. Thereby
giving the investor a two way income. Income tax is usually paid on accrued
interest even when it has not been received by the investor.
In
my opinion, I’ll consider bonds as one of the lowest risk investment with high
net returns.
Call Deposit (CD)
Call
deposit is another money market investment that is carried by putting a call
through to the bank to place ones fund in a CD. CD is a short term investment
and fund can be withdrawn on a short notice to the bank. However, only excess fund
is one advisable to invest as this is tied to the banks economy as well as withholding
tax deductions.
Investment Decision
Investors
are advised to consult their financial adviser before embarking on any
investment in money market securities. However, experience has shown that you
almost can’t get it wrong with a bond while Commercial papers might be considered
the most risky. However, if you go by the common dogma; ‘the higher the risk,
the higher the likely returns’, then I’ll advise you to trade based on the
level of risk you can take and the certainly on the amount of investment fund you have. I hope this
will be of immense benefit to many as I punch my keyboard sparingly.
To
your success!
Festus
Adeboye.
Disclaimer: All
the information contained in this text are only at the discretion of the writer
and in no way serve as an investment advice or in any way brings about a
contractual advice or agreement or a possible litigation on damages faced by
the reader. Please consult your financial adviser before embarking on an
investment.
