HOW TO MAKE MONEY IN THE MONEY MARKET

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.

THE STOCK EXCHANGE

Open up the stock table in your newspaper like that of your Business Day or Financial Standard to take a wider look at what you might have been seemingly running flipping away from or just can’t understand.  Though there are lot of figures to grapple with, those are exactly the money makers in the capital market.  Once you have a clue of what to look out for, you will be able to walk your way around it.

Starting with what the Stock market is or is not (the myths). Just like the name sounds ‘Stock Market’, a market is where you buy and sell or make an exchange.  A stock however is product or goods that have a price tag and is sellable.  Guess you have worked it out already, the stock market is a where you buy and sell or make exchange of products or goods that have a price tag and is sellable.

The Stock market is divided into two (2) tiers, namely:  the second tier securities, which includes the emerging markets (new comers into the market) and the first tier securities (the old players in the market).  However, for the purposes of this wright-up, our focus will be majorly on the first tier securities.  This is further divided into major sectors of the economy such as Banking, Insurance, Petroleum, Agriculture etc. Each sector is listed across rows and columns whereby the row shows the list of companies in the various sectors and the financial information that applies to it. Whereby columns denote the heading of the financial information listed across rows. 

Looking at our copy of the stock table and starting from the first left column to the extreme right column; the first is the Ordinary Share which lists the names of the companies in their various sectors.

Next to that is the Public Quotation Price which is used by the Nigerian Stock Exchange (NSE) to denote the entry price of each stock which is usually around 0.50k. This figure is of little albeit of no importance to us.

Just after that is the Current Market Price. As the name implies, this is the current price of the stock as its being traded or sold on the floor of the NSE. From the table, ABC Plc. has a current market price of N26.50. A ‘+’ in front denotes that the stock is readily available on the market while ‘-‘means it is scarce.

 The next column is titled Ex-, which is further divided into Div (Dividend) and Sc (Script). This indicates whether a company has been marked down for div or script (this column will be marked by an X if that is the case).  Dividend is a gain for the investor; it is the amount the company is willing to pay the investor out of their profit after taxation and other deductions. Script also a gain for the investor unlike dividend is a pay in the form of extra stock added to the one the investor already owned, e.g. for every two stock owned by the investor, one will be added (Both dividend and stock are usually decided upon at the company’s Annual General Meeting, AGM).

Next is the Business Done, which is further divided into; Price (N), Date and Quantity.  Price is the current asking/bid price of the stock at the given date. Quantity explains the volume of that particular stock that was traded for that day on the floor of NSE.

High and Low column indicates the highest and the lowest price commanded by the stock within the reference year e.g. ABC has been as high as N26.50 per share and as low as N20.49 per share. This shows that ABC is performing at its very high considering the small range of increase/decrease in price. Oops, an awfully wrong time to buy ABC.

Next is the column titled Ex-Div Date and Ex-Sc Date, this indicates the dates when the last dividend and script were paid.

Still on the table is the column for Dividend (Remember our friend the dividend; the amount that the company pays annually, pulled out of its earnings to encourage its shareholders). In the case of ABC, each year, the company pays shareholders 100k. This column is further divided into Date Paid, which is the date in which the dividend was paid followed by Inter (Interim) and Final. If the dividend is paid once in a year, the amount per share paid will be recorded in final column. However if the dividend was paid twice in a year showing a boom in business for that year, then the amounts will be recorded in Inter and Final columns respectively.  Having a quick look at what this dividend might look like; if you had a 15,000 units of ABC shares then your dividend at payment will be N15,000(N1.00x15000). Whoop, that was quick, exactly! You will have N15,000 of dividend in cash paid to you.

Our next stop on the table is the EPS (Earning per Share) column.  This is just as easy as the word go, back to our reference company ABC: assuming ABC earns Five billion Naira (N5,000,000,000) after making tax and other deductions for the year, and the total number of shares(in units) held by shareholders is Five millions units (500,000,000). Then this earning divided by the total number of shares will give us N10. So our earning per share is N10. Brilliant!

The last column but not the least on our table is the PE Ratio which is derived by dividing our current stock price by the earning per share. In the case of ABC, our current price is N26.50 and EPS is N10. Sure you got it all figured out, PE Ratio is 2.65.Cool! Now does this value really mean anything to us? This tells us that ABC is currently being traded at 2.65 times its earning.  However if say Dangote plc commands a current market price of 26.50 with an EPS of 2.39, then its PE ratio will be 11.09(26.50/2.39). Meaning the market expects Dangote Plc. to grow faster than ABC.  The PE ratio therefore shows what kind of growth the market expects of a particular company in its sector. Let’s look at the following companies’ PE Ratio; 

ABC wax-                7.50

Standard Print-    12.40

London wax-         17.80

Next clothing-       15.60

This PE ratio values shows that the market expects London wax to grow the fastest, Standard print and next clothing to perform fairly and ABC wax to be the least performer in the Clothing sector.

However unlike the other markets such as the money market, you are placed on any form of interest but how the forces of demand and supply view the stock and sector you are trading.

There you have all you need to be a stock analyst in a way though.

Look out for my next blog on how to translate the ratios you see in the table and other noteworthy tips on analysing the stock market. Cheers and Goodluck!!!