Investment Beyond Shares

Shareholders at a recent AGM in Lagos.

Ownership of a company by buying its shares is not the only way to invest in the capital market. You can also buy bonds or put your money in what is called collective investment schemes.

Investment in shares is risky. You may lose your money. The market may crash; the company might close shop, or be nationalised as it happened to former Afribank, Bank PHB and Spring Bank. You may also lose your money to fraudulent stockbrokers etc. All these make investment in shares quite risky. These risks are either non-existence in bonds and collective investment schemes or they are reduced to the barest minimum.

In furtherance of the objective of encouraging investment through enlightenment, we would devote some time to explaining these other investment options. And the primary target is the non-experts especially ordinary people on the street.


First, we talk about bonds. A bond is essentially a debt. That is why bonds are called debt instruments.

Bonds are certificates or documents issued by any organisation that wants to borrow money from the public.
Individuals, governments and companies borrow money from time to time for various purposes. They can either borrow from banks or from the investing public. One of the reasons they may not borrow from banks is the interest rate  the banks would charge. This can be quite high. Another reason is that if they need the money to finance projects that would take a long time to execute and generate money, say ten years or twenty years, the banks may not be able to lend money for such a long time. This is because most of the money that banks have are people’s money i.e. your money and my money, and we keep the money for short period. In fact about 70 per cent of money people keep with banks is for less than six months. You can imagine the consequences of a bank lending such money for 10 years. When depositors come for their money, it would be wahala!

To avoid the burden of high interest rate and the limitation of short term funds, governments and companies resort to borrowing from the public by issuing bonds. The bonds are evidence of indebtedness or evidence that a government or company (the issuer) is indebted to you. The issuer of the bond will indicate how much it wants to borrow (e.g.  N100 billion), for how long (the tenor, usually more than one year), when it would repay (maturity) and the interest rate (coupon rate) it wants to pay per annum.  Usually bonds are sold in 1000s and multiples of 1000. But the minimum you can buy is 1000 and you cannot buy 1005 units or 2005 etc.

So when you buy bonds, you are lending, or selling debt to the issuer of the bonds. Also all the details of the debt, the tenor, the coupon rate, the maturity date are indicated in the bond.


Source: Vanguard