Students in investment: Is it worth it?

Investment today sets out confident modalities for all persons irrespective of age, gender, or ethnic background. Students need to appreciate the basics of investment which will help them understand the importance of planning for their financial future.

Many people experience financial hard times when they get older because they never got the facts on saving and investing. Once in a lifetime, everyone will love to own a car when you graduate from university or Senior High School, have money set aside for special occasions or emergencies, buy a house someday or live comfortably in retirement. These basic personal assets set the attitude for planning to achieve financial success. Once you decide what you're saving for—and when you'd like to have it—you can decide how you should save and invest. The best time to learn about money is when you're young and still in school. There’re many different ways to save and invest including: Savings account, stocks, bonds, Mutual Funds etc. If you save your money in a savings account, the bank will pay you interest, and you can easily get your money whenever you want it, but your money earns a low interest rate.

In other words, it gets a low return. Similarly, if you have ever thought that you’d like to own part of a famous restaurant, or the company that makes the shoes on your feet? That's what happens when you buy stock in a company-you become one of the owners. Your share of the company depends on how many shares of the company's stock you own. But there are no guarantees of profits when you buy stock, which makes stock one of the most risky investments. If the company doesn't do well or falls out of favour with investors, your stock can fall in price, and you could lose your money. You can make money in two ways from stock. First, the price of the stock can rise if the company does well and other investors want to buy the company's stock. If a stock rises from GH¢10 to GH¢12, the GH¢ 2 increase is called a capital gain or appreciation. Secondly, a company sometimes pays out a part of its profits to stock holders-that's called a dividend. Sometimes a company will decide not to pay out dividends, choosing instead to keep its profits and use them to expand the business, build new factories, design better products, or hire more workers.

You'll have to do your homework and learn as much as you can about the company before you invest. And only invest money that you can afford to lose. Many companies borrow money, so they could expand, become bigger and more successful. The way they borrow money is by selling bonds. When you buy a bond, you’re lending your money to the company, so it can grow. The company promises to pay you interest, normally bi-annually and to return your money on a date in the future. Unlike stockholders, bond holders know how much money they will make, unless the company goes out of business. If the company goes out of business or declares bankruptcy, bondholders may lose money. But if there is any money left in the company, they will get it before stockholders. Bonds generally provide higher returns (with higher risk) than savings accounts, but lower returns (with lower risk) than stocks.

Students must remember that, one of the most important ways to lessen the risks of investing is to diversify your investments. It's common sense: don't put all your eggs in one basket. If you buy a mixture of different types of stocks, bonds, or mutual funds, your savings will not be wiped out if one of your investments fails. Since no one can accurately predict how our economy or one company will do, diversification helps you to protect your savings. If you had just one investment and it went down in value, then you would lose money. But if you had ten different investments and one went down in value, you could still come out ahead.

The key to financial security is to have a financial plan. That means you should set financial goals and start saving or investing to reach those goals. While that may sound hard, it doesn't have to be. You'll first need to figure out where you're starting from – for example, how much do you owe, how much money have you saved already, how much money will you get from your parents or Students Loan . Next, you should set goals. Do you want a car, laptop, new clothes, and house? Once you know what you want, when you want it, and how much it costs, you can figure out how much you need to save each week or month or year.

Furthermore, unless you're lucky enough to have an unlimited amount of money, you'll have to choose how you spend your money. That means you'll have to make trade-offs and consider the "opportunity cost," meaning what you give up by choosing one option over another. For example, let's say you've got GH¢100: If you put the money in an account that earns 5 percent interest, you'll have GH¢105.00 at the end of the year. If you spend it on new clothes, you won't earn that extra GH¢5, although you should still have the clothes. But if you wanted to sell them, they'd probably be worth less, especially if they're used or out of style.

If you spend the money on video games at the video center, you'll have nothing at the end of the year, except the memory of whatever fun you had playing those games. Saving and investing for the long term has most times been the best. Perhaps the best protection against risk is time, and that's what we students are fortunate to have the most of. On any day the stock market can go up or down. Sometimes it goes down for months or years. But over the years, investors who've adopted a "buy and hold" approach to investing tend to come out ahead of those who try to time the market.

Another way to reduce risk is to do your homework before you part with your hard-earned cash. Call a broker to check up on the background of any person or company that you're considering doing business with. Find out as much as you can about any company before you invest in it. Companies that issue stock have to give important information to investors in a booklet called a "prospectus" and that information is supposed to be truthful. Always read the prospectus. And beware of "get rich quick schemes."

Conversely, Time can also be the most important factor that will determine how much your money will grow. If you saved GH¢5 a week at 8% interest starting from the time you were eighteen years old, you'd have GH¢134,000 saved by the time you're 65. But if you wait until you're 40 years old to start saving, you'll have to save GH¢32 a week to catch up. In fact, just one year's delay – waiting until you're 19 years old to start saving GH¢5 a week at 8% interest – will cost you more than GH¢10,000 by the time you're 65.

In the final analysis, its worth for us to remember that: the greater the potential return, the greater the risk. Risk is scary because no one wants to lose money, but there's also such a thing as "too safe." We all know that prices go up. That's called inflation. For example, a loaf of bread that costs GH¢1 today could cost GH¢6 ten years from now. If your money doesn't grow as fast as inflation does, that's like losing money, because while GH¢ 1 buys a whole loaf of bread today, in ten years it might only buy quarter a loaf or none.

The writer is Evans Kojo Yeboah, is a final year Mathematics & Statistics Student and the University of Cape Coast Students Council Co-ordinating Secretary, he is a Corporate Financial Analyst, and has had taut working relationship with major Wall Street Firms. He has also been on valuation team for major deal origination, private placement and Mergers & Acquisitions deals in Sub-Saharan Africa. He can be contacted on kojo.kojogh@gmail.com